This is the first year under the leadership of new Commissioner of Inland Revenue, Peter Mersi, who took over from Naomi Ferguson on 1st July 2022. It’s worth noting that Inland Revenue hasn’t had the easiest of 12 months. It did finalise its Business Transformation programme in the June 22 year, but during that period it was tied up very heavily with this and then the various COVID support programs. Those have wound down in the June 2023 year, but it got landed with the Cost of Living Payments program, which the last Government introduced in its May 2022 budget.
At first sight, the structure of the Annual Report seems similar to that of previous years, but there are several subtle differences in the presentation and layout and in the department’s apparent focus. Overall, the report feels a lot more readable and digestible than in previous years.
One of the first signs of a change of approach is the lack of reference to a mission statement. Instead, there’s a clear emphasis on Inland Revenue’s role and the benefits for everyone that it delivers. As one of the online bookmarks to the Annual Report notes, “the tax and social policy system is a major national asset which underpins the well-being of all New Zealanders.” Under the headline, “We deliver three long term outcomes for Aotearoa New Zealand” page ten of the report summarises these long-term outcomes as Revenue, Social policy payments and Collaboration.
A more collaborative approach
Now, the last point about collaboration is interesting because this is a point picked up in other places in the report. In fact, the reference to collaboration is new. The word was never used in last year’s report, but this year it is a clear theme and I think it’s a welcome development. The report also talks about partnerships noting,
“We work with many other parties to help manage and run the tax and social policy systems such as tax agents, employers, KiwiSaver providers, financial institutions and community groups such as Citizens Advice Bureau.”
The report also references the international cooperation, such as with the OECD and tax agencies in other jurisdictions. And it notes that it exchanges financial account information under the Common Reporting Standards and the automatic exchange of information with almost 100 jurisdictions. As I’ve said in previous podcasts, the depth and extent of the international information sharing exchanges that go on are not well understood by taxpayers. In fact, probably are underestimated by many.
Reviewing last year’s report, I thought Inland Revenue had a bit of a bumpy relationship with tax agents, but I noted Peter Mersi was busy meeting representatives of professional bodies, clearly with the intention of addressing this particular point. And on the ground as tax agents we can see there’s been progress in this field, and we feel that there’s a definite shift in the attitude towards ourselves with greater cooperation.
It’s also made clear in the report that Inland Revenue sees tax agents as a vital part of the tax ecosystem.
This is a very welcome development in my mind and, as I said, mirrors what we’re experiencing on the ground. We certainly would like more support, such as easier phone access and definitely an updated playlist when we are put on hold. There are only so many times in the day I can hear Sierra Leone.
Overview of report
As I said, there’s a fresher feel to this year’s report which looks better organised and more readable for the general reader. If you’re wanting to dip into the report, page 11 sets out a good overview and then pages 14 to 38 summarise its work. There’s plenty of graphics and it’s very readable.
99% of income tax, GST and employment information returns are filed digitally, pretty near identical to the June 2022 results. It currently costs $0.43 to collect every hundred dollars of tax revenue. Back in 2015, that figure was $0.80 per hundred dollars of tax revenue.
Investigations and assurance – a mixed bag
I’m always interested about specific programs Inland Revenue has been running in the compliance space and I think this is a bit more of a mixed bag. According to the report it “identified or assured $973 million in revenue through our interventions.” This covers a number of initiatives. There is reference, for example, to advanced pricing agreements, which are prepared by multinationals in relation to agreements between a New Zealand subsidiary and its offshore affiliates. The idea is to make sure that Inland Revenue is satisfied that the transfer pricing regulations have been met and revenue is not being stripped out of New Zealand. Apparently 92 multinationals have active advance pricing agreements as of 30th June representing tax assured of about $440 million a year.
Real-time reviews
One of the other great things that the Inland Revenue has got as a result of business transformation, is the ability to pretty much live track applications that are being made. This topic is probably worth a podcast on its own to explain its capability. We understand from Inland Revenue presentations that it very carefully watched what was going on when applications for COVID support payments were being made.
With real-time reviews, if Inland Revenue sees something which on the face of it, looks incorrect it can take immediate action to defer payment or put that application under additional scrutiny before it’s paid out. According to Inland Revenue’s report, real time review of returns stopped, “$145 million of incorrect or fraudulent refunds or of or tax deductions at the time of filing”. Real-time reviews mean if a person is filing online and is constantly correcting a return and it appears this is because the person is after a certain result that will be identified by Inland Revenue for review.
International compliance
As I mentioned earlier, Inland Revenue is party to over 100 international information sharing agreements. According to the report Inland Revenue it received more than 600 voluntary disclosures over the last three years, resulting in more than $74 million in omitted overseas income now being assessed. That’s a bit of a surprise in my view and is probably on the low end in my view. We see quite a bit of movement in this area with people coming forward when they realise they haven’t complied with their obligations and we help them make the right declarations and pay the correct amount of tax.
In fairness this was an area, prior to the pandemic where in the wake of the introduction of the Common Reporting Standards on the Automatic Exchange of Information Inland Revenue was gearing up to throw quite a bit of resources at perceived non-compliance. Of course, that all went sideways, but with things sort of settling back down to a new normal, we may see Inland Revenue activity pick up again depending on resourcing.
Scope for more investigation work?
$397 million of the $973 million “assured” in the year stemmed from investigation work. Comparisons are not clear, but it appears well down on previous years. So, this is an area for improvement. By a perhaps slightly unfair comparison, the Australian Tax Office recently announced that it had picked up and collected an additional A$6.4 billion in the year to June 23 as a result of its tax avoidance taskforce.
This was a specific ATO initiative which scrutinised the tax returns and outcomes of the largest 1100 businesses and multinational groups in Australia to verify that they were paying the right amount of tax.
I expect Inland Revenue looked at that program and considered what lessons and opportunities a similar program might present. But it should be said that the Australian economy being bigger it also presents more opportunities for the ATO. The other thing about the Australian economy in transfer pricing terms, is it’s further up the value chain. In other words, more value can be created and captured in Australia, whereas New Zealand is more typically a price taker. Nevertheless, I think there’s room for improvement in the investigation space.
Increase in outstanding tax debt
As of 30th June, the total amount of general tax and Working for Families debt amounted to $5.8 billion. That’s up $600 million from the June 2022 year. At year end more than 524,000 taxpayers had a tax payment that was overdue although 315,000 owed less than $1,000. During the year Inland Revenue wrote off or remitted $754 million of debt compared with $689 million in 2022.
$231 million of the $754 million written off related to penalties and interest for taxpayers affected by COVID 19. In the wake of the pandemic if a taxpayer fell into debt as a result of COVID 19 Inland Revenue adopted a sympathetic view and was prepared to write off interest and penalties on such debt.
The rise in debt is a concern, but it’s a reflection of a number of things going on, not least of which the fact the economy is slowing down. Consequently, there are 44,000 more taxpayers with tax debt than in 2022. As ever, Inland Revenue’s working with those in debt to set up arrangements to pay off the debt. As I’ve said many times previously, if you’re in debt approach Inland Revenue and if you show serious intent to deal with the debt, it is generally willing to enter into an arrangement.
During the year they entered into 163,000 such debt arrangements. That’s up nearly 20% on the 140,000 for the previous year. As of 30th June 2023, there were still 77,000 active arrangements involving tax and student loan debt, which covered about $1.6 billion or just over a quarter of all debt.
Incidentally, on the measurement of tax debt to tax revenue, tax debt is about 5% of tax revenue, which isn’t bad by international comparisons, and certainly is an improvement on the 2013 year when it was nearly 10%.
More legal action
Inland Revenue also started to play harder with defaulters. It threatened legal action or issued notice of legal proceedings against 2850 taxpayers and 35% of those promptly settled in full or set up an arrangement. It’s also issued a thousand statutory demands involving other defaulters. I think we can continue to see expect to see the level of legal action continue to rise during in the current year.
More new hires
The key to any organisation is its people. And after the upheaval of business transformation which saw Inland Revenues workforce fall by 25% between June 2018 and June 2022 this is the first year since June 2015 that there were actually more new hires than exits. Inland Revenue’s total workforce rose by a net 203 persons, or 5.2% to 4,130. Staff turnover was 10.1%, which is a big improvement on last year’s 18.7%.
As for the profile of Inland Revenue, two thirds of its workforce are women. The average age of staff is 45.3, with an average length of service of 13.7 years. Now, the length of service has fallen in recent years, but it’s an improvement on the 11.1 years’ average service in the June 2014 year.
How much does all of this cost?
What’s interesting is that Inland Revenue didn’t spend all the appropriations it received from the Government for the year. The appropriations budgeted for the year was $735 million, but it actually only spent $691 million. That underspend of $44 million was partly due to challenges recruiting staff in the tight labour market and the timing of residual transformation activities. That underspend is going to be transferred to the current year subject to confirmation by ministers.
The operating expenditure on contractors and consultants fell to $42 million from $75 million in the previous year. And apparently the ratio of contractors and consultants operating expenditure to workforce spend was 10.3% this year, compared with 17.6% now.
Last year I noted that the Department had devolved authority to Madison Recruitment Ltd to provide extra staff, which didn’t terribly impress me because I think delegating authority outside the public service is not something a revenue authority should do lightly.
Inland Revenue engaged Madison Recruitment again in June 2022 to provide contingent labour to help with the roll out of the Cost of Living Payment scheme and wrap up of the COVID 19 support work. This engagement finished on 16th December 2022.
Areas for improvement
There are three specific areas where I think there is potential for improvement. Firstly, underspending by $44 million even allowing for a tight labour market is a bit of a concern. And so, I’d want to make sure that the appropriations are fully utilised to build the appropriate capacity.
And on this I would just say that during the election campaign, National campaigned on cuts to civil service and Inland Revenue is one of those departments identified for savings. As I’ve noted, Inland Revenue has lost a quarter of its staff since 2018. In fact, if you look at the numbers National used for their policy, you can see that the increase in Inland Revenue’ spend since 2018 was 20%, whereas inflation since June 2018 is 23.4% (based on the Reserve Bank’s inflation calculator).
In other words, Inland Revenue has not been increasing its staff and spend above inflation. The Business Transformation program has delivered quite a lot and the report has some very interesting commentary on this. The estimated cumulative reduction in compliance costs for SMEs is thought to be around $925 million. The cumulative additional Crown revenue was expected to be $1.86 billion for the year and next year it projected a $2.8 billion. Internal Revenue is achieving its goals, but there’s always room for improvement. If the incoming Government’s finances are going to be tight which is what we’ve heard, it seems odd to be proposing reductions for a department which is actually very efficient and which gets a very good return on investment.
Getting better returns on investment
That said two of the areas where added investment measures return between $7 or more per dollar invested would be investigative capacity and debt management. In the area of debt management generally, we appear to be in the downside of the economic cycle so debt is bound to rise and to some extent there’s little Inland Revenue can do about that.
Student Loan debt a major area for concern
But there is an area where I think Inland Revenue really should and could be doing a lot more, and that’s in the student loan debt sector because the numbers are really quite large. The total amount of student loan debt rose by over 10%. And it’s particularly increasing in relation to overseas based borrowers.
Inland Revenue ran a specific campaign in May this year to remind those overseas based borrowers who had missed payments due on 31st March. It contacted nearly 75,000 such borrowers resulting in over 3000 instalment arrangements. But at this stage, the amount of overdue student loan debt now stands at $2.2 billion and over $2 billion of that is overseas based borrowers.
And this is where Inland Revenue does not seem to be as on top of the issue as it should be. I talked previously about the agreement with the Department of Internal Affairs in relation to child support. The same information sharing agreement is used to track down student loan debtors. During the year Inland Revenue received nearly 237,000 contact records from the Department of Internal Affairs. Through cross-checking its records for overseas based student loan defaulters, it managed to get hold of 88 defaulters resulting in 108 payments totalling $16,421. That’s pretty average, to put it mildly.
Time to rethink the Student Loan scheme?
If we are looking at where to put extra resources, then there’s something else we need to think about in this area. Just adopting a big picture approach here maybe we should ask whether in fact the student loan scheme is achieving what we want. I came across a graph in the Financial Times which noted that English graduates leave university with far more debt than those in other developed countries, including the US. English graduates were leaving with debt in excess of USD50,000 (NZ$85,000). New Zealand graduates are just below the US with USD26,232 or NZ$45,550 on graduation.
And we have a large diaspora with over a million Kiwis overseas. We have a large amount of overseas student loan debt, but we also have a skills shortage. I just wonder whether as well as trying to find a better way to manage that debt we should be thinking more about encouraging people who’ve taken on student debt to stay here to meet those skills gaps maybe through debt moratoriums.
I would say overall for Inland Revenue it’s been a good year mostly, a difficult one at times, but it’s done a good job. However, I think the issue of debt management needs to be addressed swiftly and be properly resourced.
Well, that’s all 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 pai to rā. Have a great day.
An Australian case highlights the problems around removing GST from food, and as the Government’s financial statements for the year ended 30th June 2023 are released, instead of our tax cuts do we actually need more tax?
Last week I mentioned the retirement of Geof Nightingale and I also surmised that it wouldn’t be long before we heard from him again. And sure enough, this week he popped up on Mike Hosking breakfast show talking about the various tax policies on offer. After a tongue in cheek confession that this had all given him a bit of a headache, Geof then made the very wise suggestion that perhaps it is time to establish an independent fiscal costings unit so that during an election campaign the claims of the various parties can be scrutinised impartially.
As Geof noted, this is actually something the Labour Party proposed in the run up to the 2014 election. Now, given the claims, counterclaims and accusations this week about exactly how many families would gain the maximum benefit from National’s tax proposals, maybe this is something which should be looked at again. On the other hand, someone else has also suggested perhaps we can refer them for false advertising? Probably a bit too late for that really.
Removing GST on food – a legislative headache in the making?
Moving on, the multi-party debate on Thursday night on TV1 threw up several moments of light relief, including when the leaders were asked to comment on National’s foreign buyer tax policy and Labour’s proposal to remove GST from fresh and frozen fruit and vegetables. None of the leaders thought much of either policy.
This prompted moderator Jack Tame to challenge Winston Peters, noting that New Zealand First’s manifesto proposed the removal of GST from food. (For the record, the Greens and Te Pati Māori both propose to go further than Labour on this point). It turned out, however, that New Zealand First had literally just updated their manifesto, dropping the original proposal and instead proposing it would “secure a select committee inquiry into GST off basic fresh foods. We must examine if this would deliver real benefits for taxpayers before legislating for it.”
Maybe New Zealand First’s change of tack on this topic was prompted by a recent Australian tax case. In this case the court ruled that a series of frozen food products were subject to GST and could not be zero rated (or “GST-free”, in Australia’s somewhat peculiar GST terminology). In brief, what happened was that Simplot was marketing six frozen food products such as a fried rice or pasta product, each of which contained a combination of vegetables and seasonings, as well as grains, pasta and/or egg.
The case turned on around what constitutes a kind of food marketed as a prepared meal. If they were food, as Simplot argued, then no GST applied. However, if they were if they represented a kind of “food marketed as a prepared meal but not including soup as per Australia’s GST legislation“, then it would have been subject to GST.
After an exhaustive analysis, including examining the packaging and advertising, Justice Hespe ruled GST applied. But it appears that she was none too happy with the whole process and the legislation. She remarked in paragraph 141 of her judgement
“The legislative scheme with its arbitrary exemptions is not productive of cohesive outcomes. It has left the Court in the unsatisfactory position of having to determine whether to assign novel food products to a category drafted on the premise of unarticulated preconceptions and notions of a “prepared meal”. It may be doubted whether this is a satisfactory basis on which taxation liabilities ought to be determined.”
Now that’s probably justice speak for “You have got to be kidding that we have to do this every time.” But they represent pretty wise words of warning for future drafters of any New Zealand legislation removing GST from food.
More tax, not less?
As mentioned at the beginning, a key part of the election campaign has been the various tax proposals on offer, and particularly promises of tax relief in the form of tax cuts or threshold adjustments. Each of the parties, with the exception of Labour, have something on this. But in Stuff economist and previous podcast guest Shamubeel Eaqub said of both Labour and National that they were, “pretending somehow we don’t have long term big, long term issues that we need to deal with and time is running out.” He continued, “In terms of reaching surplus they are all saying getting back to surplus is important but how do you do it while giving tax cuts and spending on things we’ve already promised ourselves?”
I echoed his comments in part by saying that I didn’t believe the politicians of the two main parties are “being serious enough about funding what’s ahead.” And I noted that it was the coming challenges in terms of the ageing population and in particular related health care and superannuation costs that had prompted the last Tax Working Group to propose a capital gains tax.
Several other commentators weighed in as well, and I’d recommend reading in particular what I thought was some fairly insightful commentary from Gareth Kiernan, the Chief Forecaster at Infometrics. He noted something that’s been a theme of this podcast for some time, that New Zealanders are already paying significantly more tax due to the issue of bracket creep because income tax thresholds had not been adjusted since 2010. Governments had benefited from inflation moving people into higher tax brackets.
But in his opinion, this policy,
“It reduces discipline on government spending and muddies the tax and welfare decision for voters. It would be more appropriate for tax thresholds to be indexed to incomes or inflation, so that if any government wanted to alter the income tax rates or thresholds, they would need to articulate the reasons for their policy.”
He also went on to note,
“..in the current environment, one might argue that there needs to be more investment in infrastructure, and more funding for healthcare, and therefore taxes need to go up to pay for that. Alternatively, one might argue that there has been considerable expansion in government spending in recent years with few results to show for it, so spending needs to be reined in and taxes can be cut to go alongside that change.”
Now, I posted a link to this story on LinkedIn and it provoked a lively debate. A couple of people came back straight away with the reasonable assertions if we cut out wasteful expenditure and enforce the tax legislation, we would have sufficient income and that we may not necessarily get a better economy or better outcomes for people by increasing tax.
What is the state of the Government’s finances?
Now, the question of how much the Government spends is quite relevant in this particular example, because this week and providing some context, the Government’s financial statements for the year ended 30th June 2023 were released.
Tax revenue was up +$3.9 billion on June 2022 to a total of $111.7 billion. But that’s actually about $3 billion less than what was projected in the Budget in May. And the main reason for that fall is that corporate tax income at just under $18 billion, is -$2.4 billion below forecast, although higher withholding taxes on interest and dividend income has somewhat compensated for that fall. The GST take was bang on with what was projected at the Budget ($28.13 billion)
Ultimately the Government overall had an operating deficit before gains and losses of $9.4 billion. There’s been a lot of debate about government spending and core Crown expenses as a proportion of GDP were 32.2% of GDP, which is down from 34.5% in the June 2022 year. And the reason for that is the end of the COVID 19 restrictions and support that was given. Net debt is 18% of GDP, which is incredibly low by world standards.
And actually, here’s something we’ve I’ve mentioned before, but perhaps isn’t really known is that we are currently one of the few countries, according to our financials where the Government has positive net worth.
The government has net wealth of about 46% of GDP, whereas some countries such including Australia, which surprises me, are actually negative. Obviously, the big standout here is Norway, thanks to its trillion-dollar sovereign wealth fund.
The OCED measures of debt is slightly different, but general government debt is still below the OECD average. But like the commentators who are thinking we should be looking at our spending, I’m of the view we need to be investing in our infrastructure beyond roads.
But one of the things that puzzles me and it’s always brought up about government spending, it seems, is that somehow $55 million was spent on a proposed cycleway across the Auckland Harbour Bridge, which never eventuated. And then there’s a significant amount of money that’s gone into mental health, but yet doesn’t seem to have found its way to the frontline. So, I definitely agree with the view that there’s questions to be asked about the quality of our spending and how effectively it’s deployed is the quality of our public service able to deliver on what’s required? It may mean the answer is a combination that we do need more funding, but also we may actually need to invest in the capacity of bureaucrats to actually deliver.
The climate change bills arrive for Auckland ratepayers and us all
But the key point I want to come back to about the costs ahead which we’re not hearing enough about from the two main parties, is how are we going to manage the impact of climate change? This week, remember, Auckland Council has just signed off on the process of what’s to happen with a buyout of 700 properties that were red stickered following the January and February floods. That’s going to cost a total of $774 million, $387 million of which is going to come from the government.
Of note here and it’s something quite a few people have raised a red flag about, is that although insured Category 3 property owners will receive 95% of the the pre-flood market value, those who were uninsured will receive 80%. This raises the issue of moral hazard – if that’s what’s going to happen why bother insuring.
This is a big issue that I think we have to discuss: how are we going to fund all of this? Then if we are going to be in a scenario where we have to be buying out property owners, is buying out uninsured people fair for the those who have insured themselves? Is this approach a fair cost both to the people in the affected local government area and those generally in the wider population, because that’s who’s funding these buyouts.
In my view this is going to be a bigger issue because, I want to repeat again, we have so much of our wealth tied up in property, and yet property is the asset class that is most exposed to the effects of climate change. We’ve had Auckland with 700 homes, and over on the East Coast there’s another 400 homes, I believe, where this buy out process is underway.
If we are going to be assisting property owners, and I believe we should, is the quid pro quo that the level of taxation on property rises? Bernard Hickey had some interesting stats in his daily Substack The Kākā around how much of our wealth relative to the country’s GDP is committed to housing. A total of $1.6 trillion, or four times our GDP, is committed to housing. But more importantly, although that’s not so out of line with other countries, it dwarfs our other investments
This royally skewed set of incentives is why our housing market is worth NZ$1.6 trillion, which is four times our GDP (NZ$400 billion), 10 times the value of our listed companies (NZX total market value of $160 billion), eight times larger than our total managed funds sector ($200 billion including NZ Super Fund and ACC) and 16 times larger than our only-very-marginally-incentivised household pension funds (Kiwisaver at $100 billion). For comparison, Australia’s housing market is worth the same four times GDP, but is worth four times stocks, three times and funds under management. In the United States, its housing market is worth twice GDP, once the stock market, twice funds under management and 7.5 times its comparable ‘subsidised’ household pensions market, which is known as 401k in America, rather than KiwiSaver.
Bernard believes, and I agree having looked at it when researching Tax and Fairness this overinvestment is a by-product of our tax settings. Therefore, if we change those tax settings around the incentive to invest in property that may change two things. One, we invest in more productive assets. And two, we raise the revenue to help deal with the coming crisis around climate change.
Will the Election change the discussion?
But at the moment it has to be said that funding the cost of climate change is not part of the two major parties’ discussions around tax, but who knows? My view is the debate around tax policy and our tax settings isn’t going to end with the Election next Saturday, it’s going to continue beyond that. In my view these issues around funding climate change will accelerate. If we can come to some form of multi-party accord on this, I think it will be better for us. But tax is politics, so don’t be holding out too much hope for agreement soon.
Well, that’s all 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 pai to rā. Have a great day.
Last week The Post published a story about Roger and Shaun Nixon, father and son landlords who by The Post’s calculation owned at least 111 residential and lifestyle properties either in person or through a combination of trusts and companies. (In total across various entities and including commercial, industrial and retail properties the pair apparently own over 300 properties across the length of the country from Kaitaia to Invercargill, including properties on Waiheke Island and Omaha, where former Prime minister Sir John Key had a holiday home).
The story was produced as part of The Post’s Mega Landlords series, and I spoke to journalist Ged Cann on the question whether many of the homes in this property empire would ever re-enter the market for sale. As I explained, at the moment there are no tax incentives such as a capital gains tax or an inheritance tax (what we used to call Estate Duties), which could force the break-up of the Nixon’s holdings.
Estate and Gift Duties were first introduced in the 1890s, and were in part designed to provide a relatively good source of revenue for the Government, but they were also a means of breaking down large estates. The Liberal government of the time was concerned about accumulation of excess wealth and the related issue of inequality which drives a lot of discussion in this area. Inequality will exist in any society, no matter what the tax setting settings are. I think it’s a by-product of any modern capitalist society. Some people are extremely able to use their advantages of natural and inherited capital to make fortunes. And by and large, I don’t have a problem with that at all.
The question we should be addressing is how far we are prepared to accept inequality and what strains it puts on our social system. It’s a difficult question to answer. We have seen a rise in inequality since the 1980s and the end of the post-war consensus where higher taxes were seen as means of equalising society. And I spoke to Ged about one of those tax tools used, Estate Duty which disappeared just over 30 years ago.
Estate and Gift duties were quite a substantial part of the tax revenue for New Zealand governments for a long period of time after the 1890s, right up until probably the turning point with the election of the First National Government in 1949. For the year ended 31st March 1949 the total amount of land tax, estate and gift duties amounted to just under £7 million of the government’s £130 million revenue. In other words, it was the equivalent of 5.3% of the total tax take for that year. If you were to project that forward, it would be the equivalent of $5.7 billion using the June 2022 numbers. So, these taxes were a very significant proportion of past governments’ revenue.
Whatever happened to Estate Duty?
Starting with the election of the First National Government the exemptions from Estate Duty were widened. This started to undermine the theory we’ve often discussed here and which I strongly support, of a broad based, low-rate approach to taxation. The broader the tax base, the lower the tax rate you can apply. And to a large extent this was the case with estate and gift duties.
But what happened was that exemptions for Estate Duties (and Land Tax) began to be expanded. And therefore, as the exemptions expand, the tax base is narrowing and then the tax take starts to fall away. And gradually, over time, the numbers diminished to the point of insignificance. Land tax was abolished in 1990 and Estate Duty reached its end point in 1992. Gift duties, for whatever reason, lingered on until 2011, before they went on the not on reasonable grounds that the barely $2 million revenue collected was far outweighed by the compliance costs.
The question that should come up is whether, in fact, the abolition of Estate and Gift Duties was a wise move on two points, firstly for maintaining a broader tax base. And secondly around this question of inequality, because Estate Duties are something that can hit estates very, very hard particularly where perhaps too much is tied up in illiquid assets, such as property. This is something I’ve seen quite a lot in the UK with the effect of what is now called Inheritance Tax.
To repeat a point I have made before, the absence of Estate and Gift Duties makes our system unusual because we don’t have a capital gains tax. (We’ve also removed stamp duty although by and large, tax theory has that stamp duties are pretty inefficient taxes. Still, they linger on everywhere else). So, we have no taxes which could be part of breaking down large estates. We have to accept whether that’s a good or bad thing.
Following IAG’s move do we need to broaden our tax base to deal with climate change?
My view is that we ought to be thinking about the question of broadening our tax base. And in that context, I’ve been thinking quite a bit on this question of estate and gift duties, because this week there was another reminder of an issue I keep raising – the growing costs of dealing with climate change.
The insurer IAG announced this week it will not offer ongoing insurance for properties in Category 3 of the Government’s Land Categorisation framework for regions affected by the floods earlier this year.
The cost of the property damage this year by those events is currently several billion and climbing. Of course, property owners are the persons that are most closely affected.
One of the doubts I have about National’s proposed foreign buyers tax is about the type of properties foreign buyers are likely to be purchasing. In Auckland, there is a growing number of suburbs where the average price is $2million. But foreign buyers aren’t necessarily wanting to buy a rundown villa in Grey Lynn or Devonport, they’d probably be looking at flashier properties in coastal areas. However, these coastal properties could now be more exposed to climate change which could be a factor in them deciding not to purchase.
Of course property owners, maybe including the Nixons, have already been affected by climate change and if they are struggling to insure their properties, they will be looking to the Government for assistance with this. And so it seems to me we are rapidly reaching a break point because we’re not taxing capital and property in particular. This is going to create a huge issue between those on one hand who have property and want government assistance when their property is flooded out or damaged beyond repair and insurance is limited or not available. On the other hand, there is a group who don’t have property and can’t get onto the ladder, who will, through their taxes end up paying for the former. This dichotomy sets up a whole social strain, which I don’t think we really want.
To repeat, the thing about this story of the megalandlord Nixons is how it illustrates to me this dilemma we have created around the taxation of capital and the preference for property as an asset class.
So why is the New Zealand Super Fund taxed?
There were some very interesting responses to last week’s commentary about the New Zealand Superannuation Fund’s (“the Super Fund”), retiring CEO Matt Whineray’s remarks on the fund’s tax status. (Thank you again to all my readers and listeners for your contributions). The question was asked, ‘Well, why does it pay tax?’ The answer, as I indicated in last week’s podcast, it was designed as such when the Super Fund was being set up prior to when it actually started investing 20 years ago this month.
“There are two main issues surrounding the tax status of the proposed super fund. The first of these is the tax avoidance opportunities that would be created if the fund was tax-exempt. The second is whether poor incentives would be created regarding investment behaviour.
…By making an entity tax exempt, the government effectively gives it an asset that it can trade with taxable entities. Current tax-exempt organisations such as charities have engaged in complicated schemes to take advantage of this kind of opportunity. …
We consider that making the fund tax exempt will create an opportunity for this kind of avoidance activity.”
The driving force of this paper was concern that giving the Super Fund tax exempt status would give it poor incentives. And so, the fund was set up on that basis. (It’s also interesting to note that the paper assumed the Super Fund would be contracting out most of its fund management activity. However, as we know, the Super Fund is now one of the largest fund managers in the country).
Changing the FIF rules
Back when the Super Fund was being established the tax treatment under the foreign investment fund regime was very different. There was what we call a “Grey list” that applied to investments in several countries such as the US, Australia, UK, Germany, Japan and others. Investments here were only taxed on dividends and capital gains would be taxed under the normal rules, similar to those we have now for investing in Australia and New Zealand. The amount of tax payable on these investment would not have been quite significant under those rules.
However, in 2006, proposals were introduced establishing the current Foreign Investment Fund regime which took effect from 1st April 2007. Now, the interesting thing is that I cannot see any commentary or submission to the Finance and Expenditure Committee by the New Zealand Super about the changes, although there’s plenty of commentary from the Corporate Taxpayers Group and others. As I mentioned last week, some 3,400 submissions opposed the changes, and only two were in favour. So of course, the measure went ahead.
From that point the New Zealand Super Fund started to pay a lot more tax. (In the year to June 2008 the fund had a loss of $704 million but had a net tax bill of $164 million because of the changes to the FIF regime). The effect of the FIF regime was described in a submission the New Zealand Super Fund made in 2018 to the last Tax Working Group. It said it would like to be tax exempt because as I noted earlier it’s the only sovereign wealth fund in the world which is taxed. Its tax status also creates some issues when it is investing overseas. In support of tax exempt status, the submission (signed off by then acting CEO Matt Whineray) noted.
“The fund’s tax position can be volatile depending on the performance of the fund and the contributors to that performance. This is often illustrated by our effective tax rate. For example, our effective tax rate was 3% in 2015, 96% in 2016 and 20% in 2017. The main driver of this volatility is how our physical global equities are taxed under the fair dividend rate regime. In simple terms, this means that in any given year, if our return in global equities exceeds 5%, then our tax rate will be lower than 28%. And if our returns are less than 5%, then our tax rate will be higher than 28%.”
Another interconnected issue for the Super Fund is that as so often is the case, I think Governments rather like the tax revenue from the Super Fund. However, as the Fund’s Tax Working Group submission noted if it was tax exempt it would not be forced to sell assets to pay “the Government provisional tax with the Government then turning around to pay the Fund contributions, thereby removing the need for practical work arounds in terms of offsetting provisional tax”.
As I said, way back in 2000 when they were considering the tax status of the New Zealand Super Fund, the FIF regime was very different. And I wonder whether if they had foreseen the impact of the FIF regime that was introduced from 2007, whether they might have rethought the decision to tax the Fund.
Act is now accepting that cannot happen but instead the top rate from 2026 will be 33%. What it has also said, and this is interesting, is that the top 39% rate will remain until then.
One of the proposals in ACT’s “Alternative Budget” is the Government will stop making contributions to the New Zealand Super Fund. But what won’t change, however, is the tax status of the fund, and it will still be taxed.
Now the ACT numbers are quite detailed, and they note that the expected tax revenue from the New Zealand Super Fund will actually drop by about $100 million over the three years to June 2027 period because of lower Government contributions. (Incidentally, in measuring debt-GDP ratio ACT’s Alternative Budget excludes the $65 billion value of the NZSF which rather unfavourably distorts the ratio).
ACT also proposes winding back the KiwiSaver member’s tax credit (the Government contribution you receive if you make contributions of at least than $1,043 a year), for higher income earners. Instead, it will be capped at 5% of a participant’s taxable income. The maximum subsidy amount will reduce by 3% per dollar of income above $48,000, reducing to zero by around $65,000.
Well, that’s all 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 pai to rā. Have a great day.
Tax continues to feature heavily in the Election with the ongoing debate over the validity or otherwise of National’s proposed foreign buyer tax. But away from the election, it has been a busy week in the tax world. By far the most interesting story, partly because of its source, but also how it speaks to the structure of our tax system, is the commentary from Matt Whineray, the outgoing chief executive of the New Zealand Superannuation Fund (NZSF), about the fund’s tax status.
In an interview with the New Zealand Herald’s Markets with Madison, he remarked on the NZSF’s tax status, noting that since the fund began investing in 2003, it had paid nearly $10 billion in tax, including $2.2 billion for the year to June 2022.
This makes it by far and away the largest single taxpayer in the country. He thought this was rather nonsensical and that the fund really should have tax immunity status in line with many other sovereign wealth funds around the world, (including ACC and the Reserve Bank of New Zealand, both quite substantial investment funds). “My wish would be that we didn’t pay tax because I think that would solve a few issues.”
A nonsensical money-go-round?
He questioned the practice of the NZSF returning money to the Crown in tax, and the Crown in return contributes to the fund annually. “If I take my wallet out of this pocket and put it into this pocket, I haven’t got richer.” The problem, in his view, was exacerbated when the Crown stopped contributing to the fund completely, as it did for almost a decade between 2009 and 2017.
It’s interesting to hear such commentary from Matt Whineray, which highlights an anomaly about the NZSF, in that it is a sovereign wealth fund, but it pays tax, which is highly unusual around the world. In fact, I’m not sure there are any other sovereign wealth funds which do pay tax. (It’s an issue Whineray’s predecessor Adrian Orr also raised, ashas Whineray previously).
Now when the NZSF was set up 20 years ago, the rationale behind it paying tax was this would help it make sound investment decisions based on investment principles and not by tax considerations. And in a broader sense, that’s not unreasonable. I always tell my clients, don’t let the tax tail wag the investment dog. Think in the longer-term investment and returns rather than the short, potentially shorter-term tax implications.
A “Fair” Dividend Rate?
Someone else this week commenting on this question of the tax status of savings was financial planner Rachelle Blanch speaking to Susan Edmonds of Stuff.
Rachelle thought it was time for a review of the Foreign Investment Fund (FIF) regime, particularly in relation to how it applies to portfolio investment entities such as KiwiSaver funds. Now, the FIF regime and the Financial Arrangement regime are the two main reasons the NZSF pays so much tax. That’s because both regimes tax unrealised gains and there will be substantial unrealised gains in investment funds.
As the story in Stuff noted, under the FIF regime KiwiSaver funds and the NZSF must use what’s called the fair dividend rate in respect of their overseas shareholdings. This deems 5% of the opening market value of the investments held at the start of the tax year to be taxable income. Now obviously as KiwiSaver funds grow in size, and they diversify out of the New Zealand market as the NZSF has done, then the amount of tax payable as a consequence of the FIF regime will increase. However, unlike individuals or trusts, who can switch methods to mitigate the impact of a drop in values of some of investment funds by adopting what we call the comparative value method, KiwiSaver funds and the NZSF can’t do that.
How much tax is payable under the FIF regime is not at all clear. The NZSF is probably the only entity which can give a pretty accurate gauge on that. But to give you some idea of the total tax that might be payable – the Financial Markets Authority produces an annual report each year on KiwiSaver funds, and it notes that for the year to June 2022, KiwiSaver funds paid over $256 million in tax for that year. Remember in the same period, the NZSF paid over $2.2 billion.
Rachelle Bland has raised a very good question as to whether, in fact, this is an appropriate tax policy response where people have long term savings. She describes it as effectively a capital gains tax. Another way of looking at this, and it’s how I describe it whenever explaining the regime to overseas clients, is that it operates as a quasi-wealth tax.
As I said, there’s no mitigation for significant falls in stock markets. Unlike a capital gains tax regime which taxes on a realisation basis you can decide to realise capital losses and offset them against capital gains. You can’t do that under a FIF regime. Therefore you have this situation where the value of investments are falling but you’re still paying tax on the value of those investments. And that’s been the scenario for quite a few funds over the past 12 to 18 months.
What about a tax exemption then?
It’s not surprising then that quite apart from this anomalous washing – as Matt Whineray referred to the process of cycling funds from the Crown to the NZSF and then back in the form of tax – there’s also calls for some form of tax exemptions for KiwiSaver funds. You see such tax exemptions around the world for other pension schemes. New Zealand is yet again, a bit of an outlier here. The reason such exemptions were taken away in the late 1980s is they are costly. However, in overseas jurisdictions where tax exemptions apply to pension schemes withdrawals are taxed, whereas in our system we apply what we call a tax-tax-exempt approach where the contributions are made out of after-tax income, the schemes are subject to the ordinary taxation rules, but any withdrawals are exempt.
What’s the most effective approach? Well, that’s still a matter for debate. But one thing to keep in mind is that tax does have an impact on the long-term return of funds. Now, whether anyone is going to do anything about this is very questionable. The FIF regime in its current iteration has been in place now since 1st April 2007, and it generally works pretty well. The rules were very controversial when they were first proposed. There was an absolute storm of protest when they were first proposed, with Parliament’s Finance and Expenditure select committee receiving 3,400 submissions against the introduction of what is now the FIF regime, and only two in favour. In the face of this criticism, they were actually reshaped and now everyone has got used to working with the regime.
And this perhaps is the critical point. Governments appreciate the tax paid by the NZSF and KiwiSaver funds. The total tax for the year ended 30th June 2022 from those two sources probably represents just about 2% of the total tax take for that year. Therefore, changing the tax treatment for the NZSF and for KiwiSaver Funds would be an expensive move even if as a trade-off the Government might not then need to make any more contributions to the NZSF.
Wrong sort of investment signals?
Given the short-term pressures at the moment on the Government’s books, I think any move in this area is not going to happen. But I also consider it underlines a scenario where we’re prepared to tax savings under the current tax system, but generally whole asset classes, such as property, the bright line test excepted, are outside the tax net. This treatment sends an investment signal which politicians aren’t prepared to address.
Where does investment get directed? The evidence we have points to it being directed into relatively unproductive residential property investment as opposed to the likes of KiwiSaver funds, which will invest in productive businesses.
The discussion we’re not having
Now, this is a discussion we’re not having at the moment about how the tax system and investment interacts. As I’ve said in previous podcasts when you consider National is proposing removing commercial property depreciation on non-residential property again, (as is Labour for its part) in both cases to fund some form of tax cuts this to me sends the wrong signals. We’re basically directing funds away from investment in our economy into consumption.
But this is not a discussion we’re going to have because although politicians quietly recognise that whatever we the electorate might say about the impact of tax in the back pockets – and we’ll happily all take tax relief, tax cuts, how you phrase them – we also like the services tax provides. So, this dichotomy exists. We’ve got to maintain services as far as possible but not want to pay for them. But as I’ve said repeatedly, I think the under taxation of capital is an unsustainable position long term.
Donations tax credit review announced
Moving on, Inland Revenue just carries on carrying on regardless of whether the Government is out campaigning. It has been busy churning out quite a lot of interesting material. But two particular initiatives happened this week.
Firstly, on Friday, it announced it is going to undertake a review of the rules relating to the donations rebate rule. This review is part of the Regulatory Stewardship programme required of all state agencies in respect of the rules they administer. In this case, a review is going to assess whether the donations tax credit regime is operating effectively, is achieving its policy intent, and how it compares internationally.
Inland Revenue will open up consultation with an aim of undertaking this review and completing a report, setting out its findings as well as any recommendations by mid-2024. Interested parties will be contacted on this. I imagine you can expect the Charities Commission, some more major charities, would be approached. I think the main accounting bodies, together with the New Zealand Law Society will also be approached for comment on the matter.
A fairer Government debt policy framework?
The second Inland Revenue initiative and probably something that’s going to have more immediate impact ties into the rather strange case we talked about last week involving the Nelson woman who got herself into a whole heap of trouble with Inland Revenue and decided the best way out of avoiding a $365,000 tax debt was to sell her property worth $845,000 to a UK company. The Official Assignee took a dim view of the idea and obtained a court order striking the sale down.
Leaving aside the oddities involved the case is relevant for the important question of tax debt and other debt that’s owed to the Government. According to the New Zealand Herald story reported last week, as of 30th June 2023 Inland Revenue is owed nearly $5 billion.
Now, both the Tax Working Group and the Welfare Expert Advisory Group took a look at the question of debt owed to the Government as part of their reviews, and they recommended there should be some form of all of government approach to debt. Firstly trying to prevent debt arising with the Government, but also how each relevant government agency responds and manages that issue.
Consequently, a policy framework for debts the Government is owed has now been developed and has been signed off by the Cabinet. Inland Revenue this week released its report and background details on this framework.
There’s quite a bit to consider in here, not just the $5 billion Inland Revenue is owed but the other debts built up, primarily with the Ministry of Social Development and also with the Ministry of Justice.
According to this report, at present 762,460 New Zealand residents collectively owe $4.68 billion of debt to these three agencies – Ministry of Social Development, Inland Revenue and the Ministry of Justice. More than a quarter of these persons owe debt to two or more agencies and 6% that’s over 45,000 people owe a debt to all three. Furthermore, around three quarters of this debt, so that’s well over $3 billion, is owed by low-income individuals, many of whom rely on government benefits as well. 13% or just over 99,000 people owe more than $10,000 to the Government.
More than 85% of those who do owe a debt have owed it for more than a year and about 45% cent, an incredible number, have owed debt for at least four years. Finally, Māori and Pacific people are overrepresented in almost all categories of debt a sadly quite typical issue.
The debt policy framework is trying to ensure is that debt recovery is fair and effective and avoids exacerbating hardship. And above all, it aims to prevent debt occurring in the first place and not exacerbate issues.
There are three main parts to the framework. Firstly, a set of overarching principles for creating and managing debt. Then secondly, a purpose centred approach which classifies debt into different groups according to the policy purpose and discusses how different settings might be appropriate for some purpose and others. And then finally, what’s called term to person centred approach, which takes into consideration the personal circumstances, with focus on consideration of financial hardships, as I said.
These debt issues tend to exacerbate and build on each other leading to a circle of despair. $10,000 of debt doesn’t sound like a lot, but for very low-income people it seems like an insurmountable mountain.
Anyway, this framework has been signed off by the Government after feedback from quite a number of interested agencies. For example, the Citizens Advice Bureau, the Methodist Alliance, the New Zealand Council of Christian Social Services, the Salvation Army, and a whole range of other non-governmental organisations. Hopefully this feedback will build a better framework for the practice of managing this debt.
Good but Inland Revenue also needs to do its part
I welcome this initiative, but I also think that as part of it, Inland Revenue needs to be also considering its approach to debt management, such as the effectiveness of the late penalty regime, and how efficiently it is on top of managing debts, because if the debts get away from people, they just give up. That’s what my experience has shown time and again and it’s also what Inland Revenue has experienced.
I think it’s still a good step forward, particularly, in trying to bring a coordinated approach because there’s nothing more infuriating to someone who might be unlucky enough to find ourselves in a position of debt with two or three agencies, and finding that the approach taken by each of those agencies is different.
The Tax Working Group recommended a single Crown agency to manage current debt should be established to deal with this issue. That does not seem to have been part of these recommendations at the moment, maybe it might be picked up at a later stage. Nevertheless, it’s a step forward in the right direction and we’ll hope that it starts to address these issues of managing the debt fairly and efficiently for people.
The $5 billion PREFU hole no-one is worried about
And finally, this week, back to the Election. We’re still hearing plenty about tax in the election campaign. Politicians are all out on the trail telling us everything that’s going to happen or not happen. This week the formal opening of the government books happened with the release of the Pre-election Economic and Fiscal Update (PREFU). There was plenty of differing interpretation about the state of the government’s finances going forward.
But there was a wonderfully interesting little snippet which Newsroom picked up on, and that was the impact of next year’s Matariki public holiday. Matariki always falls on a Friday, and next year it falls on 28th June, which is the last working day of the fiscal year to 30th June 2024. And because of that, the cash that would come in on that day, which represents about $5 billion of GST and provisional tax won’t actually hit the Government’s coffers until the following Monday, which is 1st July and the start of the following tax year. So, on the face of it, the Government’s going to be $5 billion short of cash for the current year ending 30th June 2024.
As a Treasury spokesperson said, “This public holiday effect is expected to affect the Crown’s tax receipts but not tax revenue, since Inland Revenue will calculate accrued tax revenue as at 30 June 2024 as it normally would at any other year end.”
And for the record, this won’t really affect individuals because we file tax returns to 31st March each year. Furthermore, Inland Revenue won’t penalise people for making a payment on 1st July, the first working day after it was due because Inland Revenue hasn’t switched over to a seven-day banking. So nice quirky little story to end the week.
Well, that’s all 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 pai to rā. Have a great day.
It’s been a busy week in the tax world. The Taxation Principles Reporting Bill passed its third reading in Parliament and very shortly will receive the Royal assent. Now this was the bill introduced at the time of the May Budget, the purpose of which was to provide a statutory reporting framework and required the Commissioner of Inland Revenue to provide the Minister of Revenue with an annual report on the operation of the tax system.
This report would outline aspects of the tax system against a set of tax principles such as equity, efficiency and certainty. As commentary provided by Inland Revenue to the Finance Expenditure Committee noted. “These principles are often considered when designing changes to a tax system”.
Tax being political the Government also wants this bill to
…help improve the public’s understanding of the tax system and encourage informed debate about its future. New Zealand has seen several Tax Working Groups and Committees over the last 20 years, with the most recent being the 2019 Tax Working Group These reviews have offered useful insights into the operation of the tax system and suggestions for improvement. These reviews have also highlighted areas of the tax system where information is lacking, which makes a fully informed debate on some aspects of the tax system more difficult.
The bill requires the Commissioner of Inland Revenue to prepare and publish an annual report which considers the tax system measured against the principles included in this bill.
What will happen is Inland Revenue will produce a short form report annually with a full report every three years. The first full report will be produced in 2025 with the shorter version reports produced in the interim years starting later this year. The intention is to align the requirement for this report to be produced the second calendar year of each parliamentary term.
There’s been some discussion around whether we need this bill and how does it sit within the Generic Tax Policy Process (GTPP)? You could say it’s an extension of the GTPP and of course, it does mean that we can have a look at some of the tax policies that have been put out by the various parties and compare them against the principles set out in this bill. And I’ll be doing that a little later on. The politicians may find this new bill is something of a double edged sword.
A Digital Services Tax just in case…
It so happens a digital services tax bill was introduced on the last sitting day of this parliamentary term which is a bit of a surprise. Digital services taxes (DST) have been talked about for some time but have generally not been brought into effect. They’re obviously not favoured by the targets, the digital giants such as Google and Facebook. But they are a tool that many governments around the world have been considering implementing.
The ongoing OECD Pillar One and Pillar Two negotiations are intended to eliminate the need for these taxes. In fact, it’s a condition of the introduction of the OECD model that any digital services tax in effect would be repealed.
The Government’s actually been looking at a DST for some time. There was a discussion document back in 2019 on the topic. That said, it still was a bit of a surprise to see this bill pop up at this particular time. Arguably, you could see it as a bit of politicking. The key thing is the Government is already committed to not introducing a DST until 1st January 2025 at the earliest. Now Inland Revenue and Treasury have said it will be handy to have the legislation ready just in case the OECD deal falls over. So that’s a reason given for this bill being introduced now.
The DST would target multinational multinationals with global revenue in excess of €750 million per year from digital activities and New Zealand revenue from these activities which exceeds $3.5 million per year. The DST taxes the revenues rather than the profits, because then it doesn’t require trying to establish a connection with a multinational’s physical presence in New Zealand. The rate to be proposed is 3%, pretty standard compared with others around the world.
This bill is a more fallback measure and it’s interesting to see where it stands that they’ve made this move now. But many countries have DSTs, Britain is one, France another and India is probably the biggest exponent of them. And as I said, the Government’s basically saying, ‘We want this in our back pocket in case the OECD Pillar One and Pillar Two deals fall over.’ These are still very much up in the air for discussion, as we’ve mentioned in previous podcasts.
National unveils its tax policy
But the big news this week would have been the launch of the National Party’s tax policy on Wednesday, and it landed with quite a thump and contained quite a few surprises. National had already signaled well in advance that it proposes to increase thresholds by 11.5%. As regular listeners to this podcast will know my view is tax threshold increases are long overdue.
What about Working for Families abatement?
National has an identical proposal to that of Labour to increase the Working for Families In-Work Tax Credit by $25 to $97.50 per week starting next April. There’s a commitment that the current $42,700 abatement threshold for Working for Families will rise to $50,000 from 1st April 2026. This is also a Labour Party commitment. But as I said to a number of media outlets, the problem is that the Working for Families abatement threshold already kicks in at very low level and in fact if they had been adjusted for inflation since the last adjustment in July 2018, it would now be $51,800.
Both parties promising to raise the threshold to $50,000 in three years’ time is frankly a little off in my view. It just compounds the problem these families at the lower end of the income scale face with what we call high effective marginal tax rates because of the abatement level of 27 cents per dollar above the $42,700 threshold. This issue isn’t being addressed but instead the can has been kicked down the road.
But on the other hand, there is the proposed FamilyBoost childcare tax credit, which is worth up to $150 per fortnight for couples with childcare costs. This will be no doubt welcome, but the trade-off is the loss of the proposed extension of the Early Childhood Education subsidy that Labour included in its May Budget.
All good but how are you paying it?
In fact, the controversy around National’s plan has broken out over how it’s going to fund this program and of these proposed tax adjustments. There are several surprises here, the first of which was this proposed foreign buyer tax. Currently no one who does not have permanent residency can buy property. National are proposing to keep that in place for properties worth less than $2 million, but to allow properties worth more than $2 million to be purchased. But that would be subject to a 15% tax, which sounds a bit like a stamp duty. We haven’t had stamp duty, by the way, since 1999.
The controversy is around the numbers involved, which do seem very optimistic. Revenue of $700 million a year would imply sales of at least $6 billion in property. I’ve seen a report in the New Zealand Herald which suggests that actually something like 60 to $65 million is more reasonable. But the proposal also runs up against questions that certain of our double tax treaties and trade agreements have clauses that would not allow such a clause to be a tax to be introduced, notably Singapore and Australia.
But now it’s been pointed out that what we call non-discrimination clauses in double tax agreements may apply to this. In which case these income assumptions of tax revenue would be well short.
There is a proposal to close an online casino gambling tax loophole as its described. This would require offshore operators to pay GST and register and report their earnings for tax purposes. The suggested penalty for non-compliance would be IP geo blocking of services. It subsequently emerged that the Government got $38 million in online GST for the year ended 31st March 2023. This is a result of the so-called “Netflix Tax” which, ironically, was introduced by the National Government in 2016.
National assume the measure will raise $180 million, and I admit I raised my eyebrows when I saw that suggestion. This seemed high to me particularly when I considered that the proposed DST I mentioned earlier is expected to raise about $55 million a year. Online gambling would seem to be a similar type of activity, if not quite identical, so assuming they’re going to raise 2 to 3 times as much as a DST struck me as optimistic.
National Party documents seem to be saying this is essentially a corporate income tax. In which case, it appears this particular tax could also be caught by the anti-discrimination articles in double tax agreements. And that could mean a $140 million shortfall in National’s projections.
Good news for singletons…ironically
On the other hand I do think the proposal to increase the Independent Earner Tax Credit threshold to $70,000 from its current $48,000 is a good initiative. I’ll be honest, I was a bit surprised that Labour didn’t think to do something similar as part of its budget earlier this year. But there is actually a little bit of an irony in that this Independent Earner Tax Credit was actually going to be abolished by National under the last budget it published in May 2017. But that measure never went through because of the change of government later that year.
A counter-productive proposal and more irony
But I think one of the measures that should attract more controversy, is the proposal to remove depreciation for commercial property which includes factories. Now this is something that Labour have also proposed to pay for the proposed removal of GST on fresh and frozen fruit and vegetables.
This is a counterproductive move in my view. The proposal refers to “commercial building” but the depreciation deduction covers all sorts of property such as factories, farming sheds etc. These all depreciate. It was recognised by the last tax working group, that depreciation on commercial and industrial buildings should really be re-introduced, introduced and is actually quite common around the world.
A measure that takes it away seems to be counterproductive particularly if we’re talking about encouraging investment in productive assets. There’s also the added irony that this would be the second time that a National government had removed that depreciation to pay for tax cuts.
Overall there’s an awful lot to pick apart here and the devil is always in the detail. This does seem to point to the revenue forecasts being on the optimistic side, certainly in relation to the foreign buyer online gambling taxes.
Good news for landlords…mostly?
On the other hand, there was also no surprise about the reintroduction of interest deductibility for residential properties. But what is interesting about this move is that’s it’s not simply being fully restored as of a change of government. What’s proposed is for it to be brought back in over a two-year period from 1st April 2024. At present the proportion which would become non-deductible is due to rise to 75%. Instead it will stay at 50% non-deductible and then starting 1 April 2025 the non-deductible proportion will year drop down to 25% before becoming fully deductible with effect from 1st April 2026.
Reducing the bright-line test back down to two years will be welcome for a lot of people. The unintended consequences arising from the extension of the period to first five and then ten years were giving me and plenty of other advisors a lot of work as we try to unpick where the boundary was, and what transactions were caught. So that’s probably quite welcome.
On the other hand, there’s a surprise that nothing has been said about allowing losses from residential property investment (“loss ring-fencing”) to again be offset against other income. This hasn’t been allowed since 2019. It also appears that the proposed increase in the trustee tax rate to 39% will still go ahead. I had heard whispers to that effect, and although there’s been plenty of pushback on the proposed increase it will be interesting to see what eventually emerges.
Now about those Tax Principles…
Having just got a new Tax Principles Reporting Act in place, it is interesting to compare the principles set out in there against these policies. You’d have to say for now, not entirely a big pass. Indexing the thresholds is a reasonable measure, as I said, but that’s a minor point. The tax on foreign homebuyers probably could be said to be questionable in terms of equity. Why should one group of people suddenly get a far higher tax charge than other groups of people in reasonably similar circumstances.
The removal of depreciation for commercial and industrial buildings doesn’t seem to fit with the tax principles. And since we’re talking about things that wouldn’t pass that bill, I’d have to say removing GST on fresh and frozen fruit and vegetables wouldn’t pass muster either.
Sucks to be a student…and an Auckland ratepayer?
But to summarise, tax is politics, so we can expect plenty of politicking. There’s no doubt that the tax relief in terms of the changes in the thresholds will be welcome, but there’s going to be quite a few losers as well. Following the announcement I spoke to a student radio station in Christchurch who were wondering about the impact for students. The answer was not very much and if the proposal to remove the 50% discount on public transport goes ahead, students would be worse off as a consequence.
Auckland ratepayers are also probably worse off with the proposed abolition of the Auckland Regional Fuel tax. Mayor Wayne Brown has already said that could mean a $2 billion funding shortfall. How is that gap going to be funded?
Overall National’s proposals are very much a sort of the Lord giveth and the Lord taketh. And where you sit on that spectrum depends on how well you end up. If you’re a landlord and high-income earner, and you don’t use public transport, you’ll be reasonably okay.
On the other hand, if you’re on lower incomes, perhaps receiving Working for Families income and you do use public transport, you’re going to be worse off. But this is politics, the electorate will decide in six weeks exactly which tax policy is fair.
Well, that’s all 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 pai to rā. Have a great day.
