Tax News

Inland Revenue gets ready for tax filing season

Inland Revenue gets ready for tax filing season

9 May, 2022 | The Week in Tax

  • Inland Revenue gets ready for tax filing season and puts recipients of COVID-19 support payments under the microscope
  • Insights into the composition of the Top 0.1%

Transcript

Inland Revenue is currently gearing up to begin processing 31st March 2022 year-end tax returns and personal tax summaries. Starting later this month it will be issuing automatic income tax assessments for most New Zealanders. But in preparation for that it has been giving updates to tax intermediaries on particular matters of interest. And a couple of notifications in the latest release caught my eye.

Firstly, there is form IR833 bright-line residential property sale information return which is required to be completed whenever a transaction which is subject to the bright-line test has taken place during the tax year. What Inland Revenue is saying is the form will pop up in a client’s return if it thinks the client has made a bright-line sale. And it will also pre-populate the information on the form, including the title number, address, date of purchase and date of sale.

This illustrates something we’ve spoken about many times, the level of information that’s available to Inland Revenue. It’s actually very good, in my view, that Inland Revenue is proactively putting in this information and saying, “Well, we know this.” I am aware that a few tax agent colleagues have had some very interesting discussions with clients where this notification has popped up and it’s the first the accountant or tax agent has heard about the matter.

As of last income year, all portfolio investment entity (PIE) income must be included in individual income tax return. Inland Revenue will pre-populate returns with the relevant data but not all returns will contain all the PIE information until after the PIE reconciliation returns and filed on or before 16th May.

In the meantime, Inland Revenue has reminded tax agents about this and advised not to file March 2022 tax returns either through Inland Revenue’s myIR or other tax return software until after that date unless you know for certain that the client is not a KiwiSaver member and does not have any other PIE income. That’s something to keep in mind because I’m sure some tax agents will be under pressure from clients who think that they are due a refund but haven’t factored PIE income into the equation.

What’s also going into tax returns is details of payments received under the Wage Subsidy Scheme, Leave Support Scheme and Short-Term Absence Payments. All these are what are termed reportable income. Consequently, tax returns will be required to be filed by recipients and there is going to be an information request in relation to these as part of the tax returns. Yet again, this is another example of how MSD and Inland Revenue shared the relevant information.

Inland Revenue administers the highly successful Small Business Cashflow Scheme which gave out loans to small businesses at the start of the pandemic. The initial two-year interest free period is now expiring for some businesses so repayments will be required to start shortly.

Talking about COVID-19 support, the numbers involved were quite extraordinary: apparently MSD has so far paid out $19.28 billion in the various subsidies and leave support payments. And Inland Revenue has paid out another $3.95 billion including Resurgence Support Payments and COVID-19 Support Payments.

The Resurgence Support and COVID Support payments were paid to businesses to help them pay business costs and therefore GST output tax is required to be returned on those receipts. Where the funds are used on relevant expenditure GST input tax credits may be claimed.

Inland Revenue has started checking that those who claimed the support payments were entitled to do so and assuming they passed that hurdle, they then applied the expenditure as was intended, i.e. business expenses. And I’m hearing stories from tax agents of very thorough investigations combing through the bank accounts of the businesses and individuals who received these payments. Some have resulted in “Please explain” enquiries coming back where  apparently personal expenditure has been identified such as in one case where an EFTPOS payment for  McDonald’s was identified.

This is yet another warning for those who applied for COVID support payments they either weren’t entitled to or misapplied the payments that they may find themselves under the gun from Inland Revenue. So far Inland Revenue have decided to proceed with 15 criminal charges and court proceedings are already underway for seven. In addition, as a result of investigations and some self-reviews the repayments made to date to MSD are over $794 million. ,

All of this is a timely reminder that with things calming down a little bit and so coming back to a stability, Inland Revenue is now applying itself back to its core business activities of investigations and reviews. Expect to see more news of these reviews and I think we may see one or two interesting cases emerge.

What Parker means

Moving on, last week’s speech by the Minster of Revenue David Parker quite predictably caused a stir and there was plenty of politicking over whether or not the proposal would lead to the introduction of wealth tax at some point and whether the Prime Minister would stand by her comments it wasn’t going to happen, the usual politicking etc. etc.

Subsequently, last Sunday I appeared together with Jenée Tibshraeny of www.interest.co.nz  on TVNZ Q&A to discuss the implications of Mr. Parker’s speech. Off-air Jenée made a point echoed by several colleagues commenting on a LinkedIn post that the Tax Principles Act, if enacted, would work both ways. It wasn’t just a tool for saying, “Well, we need to introduce a particular type of tax.” It could equally stop a government introducing changes because it contradicted the agreed principles.

It’s a very valid point and it’s actually one of the sources of disagreement with the introduction of the 39% tax rate, because it affects the integrity of the tax system and the idea of administrative efficiency. Furthermore, it could apply to the measures relating to personal services, income attribution, which also I discussed last week. The argument here is that these rules would breach potential principles of horizontal equity, in that people earning similar amounts, may pay different rates of tax because of variations in the tax treatment.

Under the microscope

Other interesting insights have emerged in the wake of the speech. The Revenue Minister pointed to the lack of information about the high wealth individuals which prompted the research project into high wealth individuals would have caused some controversy. And earlier this week journalist Thomas Coughlan in the New Zealand Herald commented on an interesting briefing note about the project he’d obtained under the Official Information Act.

The briefing note looked into the representativeness of the wealth project population, and whether the high wealth research project population effectively represented the 0.1% of the wealth distribution of the population and the economic sectors they operated.

The note explains that the group that was selected for the project was based on

…environmental scanning undertaken by Inland Revenue over the past 20 plus years. This environmental scanning involved monitoring large transactions or other indications that individuals had significant wealth holdings using both public information and the department’s tax data. …

The briefing notes the selection is non-random and it is not expected to be representative of the population of all high wealth individuals. It is therefore quite possible that there may be high wealth individuals missing from the group “and there is no way to definitively state that the selected group is representative of the top 0.1% of the wealth distribution.”

Having included that caveat, the note had some interesting analysis of what they had found so far. And it had a diagram comparing the share of GDP and employment to the main activities of high wealth individuals on the basis that you could reasonably expect the share of the industries represented by the individuals to be broadly similar to the spread of industries and activities in the New Zealand economy.

But it turns out that wasn’t the case. And in particular, relative to employment and GDP shares, the property and primary sectors are disproportionately represented in this project. The number of high wealth individuals in the primary sector is approximately 15%, even though the sector represents less than 10% of GDP. In relation to the property sector the proportion of high wealth individuals is 25%, compared with approximately 15% of GDP.

However, as the briefing note commented, there are clear reasons why there is this discrepancy “…there are certain activities (investment, property ownership) that would be expected to have greater involvement by those accumulate significant wealth….”

Incidentally, the primary sector and particularly the property sector, are sectors where existing tax rules such as the Bright-line test and the associated person rules work already to tax capital transactions. So that’s another reason why Inland Revenue may have better data on this particular group of wealthy individuals than others that work in the service economy.

Anyway, it will be interesting to see what further insights emerge from this high wealth research project. Meantime, no doubt the debate over how that data may be applied and the question of the taxation of capital and wealth will continue to rage, particularly in the run up to next year’s election.

Getting ready for tax filing season

And lastly this week, the final instalment of Provisional tax for those with a 31st March year-end is due on Monday. The key point here is taxpayers whose residual income tax liability for the year is expected to exceed $60,000, should ensure that they pay sufficient provisional tax to cover that total liability for the year. Otherwise, use of money interest, which is increasing to 7.28%, will start accruing together with potential late payment penalties.

As always, if taxpayers are struggling to meet payments in full, then either contact Inland Revenue to let them know and start to arrange an instalment plan. You will find that they are generally cooperative on this. Alternatively, consider making use of tax pooling to mitigate the potential use of money, interest and late payment penalties.

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 te wiki, have a great week!

Minister of Revenue philosophises on tax and proposes a Tax Principles Act

Minister of Revenue philosophises on tax and proposes a Tax Principles Act

2 May, 2022 | The Week in Tax

  • Minister of Revenue philosophises on tax and proposes a Tax Principles Act
  • The IRS drops the ball

Transcript

Ministers of Revenue typically deliver several speeches during the year, mostly to business audiences or at the start of tax conferences.

On Tuesday, however, the Minister of Revenue, David Parker, delivered a speech at Victoria University Wellington entitled Shining a Light on Fairness in the Tax System, which is without doubt one of the most interesting speeches made by any Minister of Revenue in many years.

After some scene setting about the purpose of tax and how the Government has been able to use tax revenues to fund its COVID 19 response, Parker then pivoted to talk about beginning what he called a fact-based discussion. He started by challenging the assumption that our tax system is progressive overall.

“What’s hidden that the effective marginal tax rate for middle income Kiwis is generally higher than it is for their wealthiest citizens. Indeed, some of their wealthier Kiwi compatriots pay very low rates of tax on most of their income.”

The Minister then dived into the question of the lack of data on the distribution of wealth and capital income in New Zealand. He highlighted the fact that according to the Household Economic Survey, the highest net worth ever reported was $20 million.

This was, he said, ridiculous, given that we know there are billionaires in the country. As he pointed out, that meant the National Business Review’s annual rich list is a better set of data than the official statistics. In fact, that’s quite common around the world as statistics on capital wealth are rare and rich lists are often used to help revenue authorities gather data in this area.

So this lack of data, Parker explained, was the rationale behind the powers granted to Inland Revenue for the purposes of conducting research into high wealth individuals. As listeners will know, this is a somewhat controversial project, even though the Minister repeatedly stated that the intent was to gather better data for research and not as had been accused, so Inland Revenue could secretly work on new taxes.

“Until we have a much more accurate picture about how much tax the very wealthy pay relative to their full “economic income”, we can’t really we can’t honestly say that our tax system is fair.” And this led on to the most surprising part of the speech his proposal for a Tax Principles Act.

He referenced four principles of taxation that Adam Smith set out in Wealth of Nations back in 1776. And he noted that the many tax working groups and other reports that New Zealand has had over the past 40 years, such as the McCaw Review in 1982, the MacLeod Review in 2001, the most recent tax working group, and the all the work that went on during the Rogernomics period all basically followed these four principles set out by Adam Smith.

“They all endorse the same principles, based in that most core value of New Zealand – fairness. The main settled principles are:

 Horizontal equity, so that those in equivalent economic positions should pay the same amount of tax
 Vertical equity, including some degree of overall progressivity in the rate of tax paid
 Administrative efficiency, for both taxpayers and Inland Revenue
 The minimisation of tax induced distortions to investment and the economy.”

He also noted that recent reviews in the UK and in Australia both adopted similar approaches. Incidentally and perhaps not coincidentally here, Deborah Russell and I adopted the same principles when we wrote Tax and Fairness back in 2017.

And as you know, Deborah is now the Parliamentary Under-Secretary for Revenue and David Parker’s number two. The proposal is that officials should periodically report to ministers on the operation of the tax system using the principles as the basis for the reporting.

The Tax Principles Act would sit alongside existing legislation, such as the Public Finance and Child Poverty Reductions Acts, which also require the Government and officials to report on specific issues. This is quite revolutionary, but in a way sits within the philosophy of open tax policy that New Zealand has adopted through what we call our generic tax policy process.

This open approach to developing tax policy is widely regarded as world leading by other jurisdictions. The proposed Tax Principles Act is not inconsistent with the existing approach. The intention is there will be consultation later this year and following that a bill would be introduced once the principles had been agreed and the reporting requirements had been established.

The resulting bill would be enacted before the end of the current parliamentary term, i.e. just in time for next year’s election. The proposal caused quite a stir and there’s plenty of good reading on it. Bernard Hickey has a very good summary of the matter. 

It’s also quite rare certainly to see Ministers of Revenue philosophise in quite a public way. David Parker referenced Thomas Piketty’s seminal work, Capital in the 21st Century. He also acknowledged the very regressive nature of GST. Somewhat controversially he noted that because GST in transactions between GST registered businesses essentially zeros out and is a final tax for those who are not GST registered, it many ways it falls on labour earners.

As he put it, “GST is really paid out of our earnings when we spend it. In economic terms, GST is mainly a tax on labour income. Who pays that cost?”

The Minister noted we have limited data on the overall rate of GST paid by New Zealanders, either by income or wealth decile. So he’s asked Inland Revenue to gather data and to provide feedback on this. I suppose from a political viewpoint this hints that potentially if there are changes to a tax mix at a later date, something may be done in relation to GST as it impacts lower income earners.

All this kicked up quite a stir. When I appeared on Radio New Zealand’s the Panel following the speech, the panellists expressed some shock about the fact that we don’t really have data about how wealthy people are. I think the reason for this, which wasn’t discussed by Minister Parker, is that it’s probably largely the unintended consequences of the abolition of stamp duties, estate and gift duties, and the absence of a general capital gains tax.

In other jurisdictions which have some or all of those taxes, this gives a reference point when a transaction occurs as to what wealth is held and by whom. Incidentally, the disclosure requirements regarding trusts I discussed last week although they are primarily an integrity measure, they also represent, in part, an attempt to gather some data about wealth held in trusts and help fill the gaps in Inland Revenue knowledge.

With National and Act already putting out their tax proposals, it looks like tax will feature quite heavily in next year’s election. So it’s very much a case of let’s watch this space.

Moving on, today is the due date for submissions on Inland Revenue’s discussion document, Dividend Integrity and Personal Services Income Attribution. This contains a couple of controversial proposals.

Firstly, that sales and share of shares in a company with undistributed retained earnings would trigger a deemed dividend.

And secondly, changes to the personal services income attribution rules, which would mean more income would be attributed to a primary income earner.

Now, neither of these proposals have gone down particularly well and to describe them as controversial would be a bit of an understatement. The personal services attribution rules, in fact, may well have a very much wider effect politically than the Government might want to see.

Brian Fallow, writing in a very good column in last week’s New Zealand Herald, pointed out that the attribution rules, if enacted, would affect very large numbers of small businesses quoting former Inland Revenue Commissioner Robin Oliver “It is likely to catch tradies — a plumber, say, or a landscape contractor — with a van and some equipment and just themselves or one employee doing the work,”

And Oliver raised the question, is this really appropriate? I expect a lot of submissions on this paper, and I urge you to do so because as you can gather from comments made by Oliver, it could have a quite potentially significant impact for the SME sector.

I personally think the proposals go too far. And incidentally, one of the reasons that the proposals have been made comes back to a longstanding topic in this podcast and something that wasn’t directly referenced by Minister Parker in his speech, the absence of a general capital gains tax.

Inland Revenue proposes any transfer of shares by a controlling shareholder to trigger a dividend where the company has retained earnings. In jurisdictions which have capital gains tax, that transaction is normally picked up as a capital gain. But as we don’t have a capital gains tax Inland Revenue is proposing a workaround which I don’t think is appropriate one.

I think there are other alternatives they might want to consider. The proposals on the personal services attribution rules are an integrity measure. They build on the Penny Hooper decision relating to surgeons from ten years ago.

They are understandable, but I believe go too far and are probably targeting the wrong group of people. Moving on Inland Revenue has a useful draft interpretation statement out considering what is the meaning of building for the purpose of being able to claim depreciation.

This has actually become quite relevant because back in 2011 the depreciation rate on buildings was reduced to zero. But in 2020, in the wake of the pandemic, the depreciation rate for long life non-residential buildings was increased from 0% to 2% if you use a diminishing value basis or 1.5% if you’re using straight line method.

What this draft interpretation statement explains is the critical difference between residential and non-residential buildings. it replaces a previous interpretation statement released in 2010 which has had to be updated following an important tax case in 2019 involving Mercury Energy.

A building owner will be able to claim depreciation for a ‘non-residential building’ and that can in some cases have some residential purposes. Generally, it’s aimed at commercial industrial buildings and certain buildings such as hotels, motels that could provide residential commercial accommodation on a commercial scale. It’s a useful explanation and comments on the draft close on 2nd May.

Chump change for FATCA

And finally, a quite extraordinary story from the United States, where it has emerged that a very important tax act, the Foreign Account Tax Compliance Act, better known as FATCA, hasn’t generated as much income as was expected when it was introduced in 2010. 

The projection was that over the ten years to 2020, it would raise about US$8.7 billion US. The US equivalent of Inland Revenue, the Internal Revenue Service, (the IRS) spent US$574 million implementing FATCA. But according to a report just released, all the IRS can show for all that money invested are penalties totalling just US$14 million.

Now, that’s quite extraordinary. And this is important from a New Zealand perspective, because FATCA represents a huge compliance burden for all US citizens who are required to file tax returns, even if they may be tax resident in another jurisdiction.

FATCA was the template for what became the Global Common Reporting Standards on the Automatic Exchange of Information. The rest of the world looked at FATCA and thought, “That’s a good idea. We’d like to have some information about what overseas accounts our taxpayers have”. And so, the CRS, as it’s known, was introduced and has been in force now for about four years.

I would hazard a guess that Inland Revenue probably gathered well in excess of US$14 million as a result of the introduction of CRS. But to come back to a point that David Parker made about politics and tax being inseparable. One of the reasons that the IRS has done so badly is that the Republican controlled Congress won’t give it the money to do its job. And that situation doesn’t look likely to change.

As David Parker said, politics and tax are inseparable. And we’re going to hear plenty more about the two in coming months.

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 pai te wiki, have a great week!

The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets

The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets

13 Sep, 2021 | The Week in Tax

  • The Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Bill clarifies the GST treatment of cryptoassets
  • Latest lockdown developments
  • Treasury’s draft long-term fiscal position considers whether taxes need to increase

Transcript

The Taxation Annual Rates for 2021 to 2022 GST and Remedial Matters Bill was introduced to Parliament on Wednesday. Now this is the annual bill which is required to confirm the tax rates for the current year. And it also contains a number of GST and income tax remedial amendments. It doesn’t, by the way, include anything in relation to the proposed interest limitation rules. Those are going to be introduced separately, probably later this month, by way of a Supplementary Order Paper.

Now, what’s particularly interesting about this bill is that it clarifies the tax treatment of cryptoassets, and it has two proposed amendments which would exclude cryptoassets from GST and the financial arrangements rules.

As the commentary to the bill points out, cryptoassets probably fall within the existing scope of GST rules, although it’s a little unclear. And that means that the supply of a cryptoasset could be subject to 15% GST, or it could be an exempt financial service or a zero-rated supply to a non-resident. And what this means is that GST supply to a non-resident is zero rated, but then subject to GST when applied to residents. And that creates a distortion and a preference to sell to offshore investors. Now, that’s slightly different from the zero rating we do for exports, but it’s not seen as an export service here.

But more importantly – and this is an issue that’s well known – is that there’s a big risk of potential double taxation. That is when an asset is purchased with Bitcoin and then, for example, that Bitcoins converted back into fiat currency.

The commentary gives an example of Lucy purchasing $11,500 of Bitcoin from a domestic Bitcoin exchange. At present, the exchange is required to remit $1,500 dollars of this, being GST, to Inland Revenue on the taxable supply of Bitcoin they’ve made in exchange for New Zealand dollars. When Lucy uses the $11,500 of Bitcoin to purchase a car, GST applies on the sale of the car and therefore the company selling the vehicle must return another $1500 dollars of GST. So that means that GST of $3,000 has effectively been charged in relation to the purchase of a vehicle worth $10,000. If Lucy had used New Zealand dollars instead of Bitcoin, only $1500 of GST would have been paid.

This has been known for some time and what has happened is that the Government has decided they’re going to take cryptoassets out of the GST net. And the proposal is that the definitions of goods and services in the Goods and Services Tax Act will be amended to expressly exclude cryptoassets. Now, this amendment will apply from 1st January 2009, the date of the first cryptoasset, Bitcoin, was launched.  By the way, the definition will exclude non fungible tokens, which are going to remain subject to GST if supplied by a registered person.

So this is a very welcome development, clarifying the position that was causing some concern in the cryptoassets world, for the reasons and the example I gave a bit earlier – that there was a probable chance of GST being charged twice in essence, on the same asset. But just remember that GST is still intended to apply for non-fungible tokens as they’re regarded as a good or service that can be supplied.

Now, the other big amendment, which will be welcomed by investors in the cryptoassets world is that cryptoassets will be excluded from the financial arrangements rules. That will be done by amending Section EW5 of the Income Tax Act 2007 to define cryptoassets as an accepted financial arrangement.

Again, however, the issuing of non-fungible tokens are not financial arrangements and they do not meet the definition of a financial arrangements set up in the Section EW 3 of the Income Tax Act. This proposed amendment will also apply from 1st January 2009.

But there is one exception that people need to be aware of, that is cryptoassets will not be treated as an accepted financial arrangement if the owner receives amounts that are determined by reference to the purchase price of cryptoassets, and on the basis that is known by the owner in advance. The purpose of this exclusion is to say that cryptoassets that are economically equivalent to debt arrangements are still taxed under the financial arrangements rules.

And the commentary has an example of such a treatment. An investor invests in Bitcoin on a platform and Bitcoin is locked in for a set period and the investor is paid a guaranteed fixed return for the period that his Bitcoin remains locked into this particular platform. The commentary makes clear that the return on the growth will be taxable, so the additional 5% return will be subject to the financial arrangements rules. I think there might be some more questions dealing around that.

And the commentary also makes clear that the general rules still apply to cryptoassets. That if they’re acquired with the purpose of disposal, they’ll be taxable. Likewise, if you’re trading cryptoassets or you use cryptoassets for a profit-making scheme. But as I said, all the proposals will be welcomed by the investors in the cryptoassets world.

Now, the bill also has proposed amendments in relation to the bright-line test. Firstly, any income derived on the sale of a property which has been used as a main home will not be reduced where the person has used the main home exclusion twice in a two-year period or has engaged in a regular pattern of acquiring and disposal disposing of residential land.

The bill also has an amendment to ensure that a main home that takes longer than 12 months to construct will not be subject to the bright-line test. And this is in relation to residential land acquired on or after 27 March 2021. There’s also an amendment to clarify the application of the 12-month buffer and makes clear that a person may still qualify for the main home exclusion if they have multiple periods each of 12 months where the property is not used as a main home. So, again, that’s welcome because there was some confusion around how these rules might apply.

Business subsidies for wide public health impacts

Now, moving on, the Government’s Wage Subsidies bill has passed $1.2 billion dollars so far. And apparently this subsidy is supporting over 838,000 employees, 117,000 self-employed people and 242,000 businesses.

The highest number of supported workers are in the construction industry, followed then by food and hospitality.

Now, it’s also been made clear that although most of the country has stepped down to Level Two – the wage subsidy is not normally available below Level Three – a claim is still possible if part of the country is still in Levels Three and Four. Because Auckland has remained at Level Four, that means that businesses outside Auckland may still apply for the wage subsidy. However, they have to show the 40% drop in revenue required to meet the wage subsidy requirements is attributable to the effect of the continuation of Alert Levels Three and Four.

So that’s a wee caveat in there that people just need to be mindful of. I know that there’s lobbying going on in relation to the hospitality industry, where the impact of Level Two restrictions limit numbers in bars and restaurants to 50 or fewer. Those lobbying want the ability to still apply for a wage subsidy because they’re affected by that Level Two condition, not necessarily because of the ongoing Level Four lockdown in Auckland.

More taxes to pay for an ageing demographic?

And finally this week, government departments have been asked to prepare a series of long term insights briefings under the Public Service Act 2020. Now these are designed to make available to the general public information about medium- and long-term trends, risks, opportunities that may affect New Zealand.

Treasury has also got a requirement to produce a statement regularly on the long-term fiscal position – what’s known as Long Term Fiscal Statement, and what it’s decided to do is combine the two and it’s released a draft paper for consultation, which makes fascinating reading.

One of the things it says, is that looking at the impact of Covid, it thinks net debt will now peak at 48% of GDP in 2023. And in the Treasury’s view, there is currently no need to reduce debt levels. And it believes that deficits will shrink as the temporary support measures will end. And it also notes that debt level remains low relative to its peers such as the UK, Australia, America. The interest rate composition of debt is much more favourable than when net debt peaked at 55% of GDP in 1992.

And just as an aside, this is a global issue. The UK just this week has announced proposals which effectively increase taxes to pay for the impact of Covid and they’re quite significant increases. And I don’t think that the UK will be the last jurisdiction to be doing so.

But longer term, Treasury is noting that 26% of the population is expected to be 65 years old or more by 2060, compared with 16% in 2020. So that’s going to increase the cost of New Zealand superannuation and also expect healthcare costs to continue to grow because of an ageing population. And that ageing population will change demographics. For example, one of the things that’s happening is that the Pasifika/Māori people are generally significantly younger than other New Zealanders.

For example, by 2038, Māori are projected to account for 20% of the total population, but only 10%of the 65 plus population.

And this leads Treasury to conclude:

“Our projections indicate that the gap between expenditure and revenue will grow significantly as a result of demographic change and historical trends in the absence of any offsetting action by the Government.”

One of the offsetting actions it suggests, is to raise the age of retirement from 65. It suggests let’s have a look at what would be the impact of raising it to 67.

It also looks at what opportunities exist to raise revenue from either existing tax basis or new tax bases beyond personal income tax. And the paper sets out a number of options around raising revenue. And one is ten years of fiscal drag, which incidentally we’ve just done, which is where the tax thresholds and rates are not changed. And wage growth naturally raises the tax take as people’s income crosses income tax thresholds.

Some interesting stats here about the impact of raising GST. For example, in relation to personal income tax – if you raise income tax rates by one percentage point, so that the current top rate of 39% goes to 40%, the 33% rate to 34% and so on, that would raise 0.6% of GDP.

To get the same effect from GST you’d need GST to rise from 15% to 16.5%. And for company income tax, you’d need to raise it from 28% to 34%. So as the paper points out that would not be welcome.

The Treasury paper also points out the Government could extend the taxation of capital gains and maybe think about a land tax as well.  However, as the Tax Working Group pointed out there’s a few issues around a land tax. But the paper notes, by the way, that other countries are looking at the taxing of wealth, either by a net wealth tax or maybe taxes on inheritance.

And finally, the paper notes that New Zealand raises less from environmental taxes than other OECD countries. It’s equivalent to 1.3% of GDP, and that’s lower than the OECD average, which is roughly 2% of GDP. But it points out that environmental taxes are often behavioural taxes. In other words, they change behaviours but therefore may not be a sustainable additional source of revenue.

Anyway, there’s a lot of interesting data to consider in this paper. No doubt it will cause some controversy.

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 colleagues. Until next time Kia Kaha! Stay strong.

Time for a more generous approach to working from home allowances

Time for a more generous approach to working from home allowances

2 Aug, 2021 | The Week in Tax

  • Time for a more generous approach to working from home allowances
  • Tax agencies stepping up scrutiny of crypto-assets
  • Former Treasury Chief Economist takes a swing at the Government’s tax policy.

Transcript

A couple of weeks ago, I reported that the Inland Revenue main office in Wellington had been closed and the staff were working from home as a result of a potential earthquake risk which had been identified.

There’s still no timeline as to when Inland Revenue staff, almost over a thousand of them, will be able to return to the office. In the meantime, they’re working from home. And the question has now popped up “Well, how about a bit of reimbursement for extra costs like heating and broadband?”

Now, apparently, Inland Revenue response has been “You’re saving money by working from home. You don’t have to pay for commuting, lunches and all the rest”. But the Public Sector Association is saying, “They have to work from home through no fault of their own.” And maybe it’s time that Inland Revenue recognised that and reimbursed them for it.

One Inland Revenue staff member has noted the argument that he was saving money on commuting costs doesn’t wash, because as he put it, “the five dollars a day I spend travelling in and out of work has never been deemed by Inland Revenue as a work-related expense. It’s a personal expense and it’s not claimable.”

Now, what this points to is a grey area which requires a mix of better tax policy which lays out some better guidelines and perhaps employers as well coming to the party. The position is, as I set out last year, when this whole thing became very, very relevant when we were all working from home during the first lockdown, is that employees cannot claim a deduction for home office expenses. They are meant to be reimbursed reasonable costs by their employer. This apparently seems not to be happening generally and it seems Inland Revenue is also reluctant to do this.

There was a determination issued during last year which covered the pandemic, which said that an employer could pay an allowance to an employee working from home that covers general expenditure and up to $15 per week would represent as exempt income. But $15 a week is pretty low with broadband costs and heating costs.

So the question was raised back then and it’s now back on the agenda again in a slightly more ironical context that we perhaps need to be setting out better guidelines. It occurs to me, for example, in the film industry, I understand per diems have been agreed of around $50 per day for contractors working in the film industry. And that’s taken to be a reasonable estimate of the costs they would have incurred.

The position I’m coming to here is Inland Revenue perhaps needs to grasp the nettle and issue more determinations which are more generous in scope and make it clear that for employers who pay these allowances, the extra allowances will be deductible, and the expenses will be non-assessable for employees.

Working from home does shift some of the costs to the employee. And I think it’s only fair that they get reasonably reimbursed. The legislation is in place, but I think it seems clear that the correct practise isn’t always understood and followed by employers. So maybe setting out new actual monetary limits would be a better approach going forward, even if Inland Revenue seems rather reluctant to do that.

Everyone is looking at cryptoasset taxes

Moving on there is increasing scrutiny of the cryptoasset world, and it’s tied into tax authorities wanting to get a better understanding of people’s assets, plus suspicion that people are using virtual assets to evade tax and also that cryptoassets are part of illegal activities and money laundering.

So as part of that, earlier this week, the United Kingdom Treasury announced a proposal that will require any virtual asset transfer of above £1,000 to be accompanied by detailed personal information of both the originator and the beneficiary.

This is tied into proposed amendments to money laundering legislation required to keep the UK’s regime in compliance with the recommendations of the Global Financial Action Task Force. The Financial Action Task Force said in July 2019 anti-money laundering legislation should cover cryptoassets. Putting the legislation in place has always taken a little bit of time.

Anyway, this is another sign of the increasing attention that tax authorities and authorities generally are paying to virtual cryptoassets.

Over in the United States the Internal Revenue Service, in conjunction with the New York State U.S. attorney’s office, has been briefing experts on the latest U.S. government enforcement efforts related to virtual currencies and cryptoassets.

As of April 2021, the IRS has joined its civil and criminal cryptocurrency units through Operation Hidden Treasure. Its Fraud Enforcement Office and Criminal Investigation Units are working with international law enforcement and crypto industry experts to root out tax evasion. And apparently, these include something called John Doe summonses, which sounds pretty sinister, and no doubt will pop up on some American TV show in due course and be explained to us.

The US Federal tax returns, Form 1040, now includes a question on virtual currency income, and it’s actually at the top of the form. That’s deliberately designed in order to make it easier to prove the knowledge and willfulness element for criminal cases in this matter.

So what we’re seeing is a trend all around the world of really amping up the scrutiny of cryptoassets. It’s a fast-moving field and the tax treatment isn’t always as clear as it could be. But Inland Revenue here is continually issuing guidance on the matter. And people need to pay attention to this. You should expect that the tax authorities will have some idea of your cryptoassets holdings and therefore you should follow the law and file returns as appropriate.

Facing up to unintended consequences

And finally this week, a couple of things in relation to the ongoing arguments over the Government’s interest limitation rules. Firstly, Inland Revenue has issued a very useful precis of all the questions and answers relating to the interest limitation rules and bright-line tests.

At 22 pages it’s a much more digestible document than the main discussion document. And of course, Inland Revenue is still working through all the submissions. So it’s a useful one stop shop to go through and get an idea of what’s been said so far. However, you should not take what’s in this Q&A as actual policy. They’re still working through it and the final version still has to be signed off by the Minister of Revenue and Cabinet.

But meantime, Norman Gemmell, who is the chair in public finance at Wellington School of Business and Government, Victoria University of Wellington, and former chief economist at New Zealand Treasury has come out with a working paper entitled What is Happening to Tax Policy in New Zealand and is it Sensible?

It’s a very quick read about 14 pages which looks at the increase in the top income tax rate and the housing package, that is the interest limitation rules, increased bright-line period and other related matters. Basically, it takes the view that both represent ad hoc responses without a coherent strategy. It notes that these were pushed through very quickly based on limited analysis and against most official advice on the matter as to how to deliver on the Government’s objectives.

And in Gemmell’s view, there are potentially serious unintended consequences. In particular, the coherence of the tax system is at risk, and it’s not an unreasonable argument. In fact, someone quipped that’s a statement of fact not an argument,

But this comes back to what I said last week, that when you look at where there is incoherence in the tax system, it keeps coming back to the question of the taxation of capital and of property in particular. We keep fencing around this issue and the unintended consequences of doing so, force further unintended consequences of the actions taken to try and remedy that.

There won’t be an easy answer to this solution until that nettle is very firmly grasped and the politicians put the politics aside and look at how exactly are we going to achieve a coherent tax system and address the issues of diversion of resources away from productive assets, inequality, and housing affordability.

All of those require a comprehensive approach and taking a different approach to what we’ve been doing up to now. The latest patches may work, perhaps, but they come with unintended consequences as Mr Gemmell points out.

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 week ka kite āno!

Observations on the International Fiscal Association conference

2 Mar, 2021 | The Week in Tax

  • Observations on the International Fiscal Association conference
  • Covid Resurgence Support Payments applications go live
  • Inland Revenue/Treasury analysis of wealth in New Zealand causes a stir

Transcript

Last week I was in Queenstown at the International Fiscal Association’s annual conference. This is probably the most attended tax conference in New Zealand for anyone interested in tax policy.

Traditionally, the conference is opened by the Minister of Revenue, and the Commissioner of Inland Revenue Naomi Ferguson attends together with many of the most senior Inland Revenue policy officials, many of whom make presentations on matters of tax policy.

The conference is held under Chatham House rules, which means I can’t actually say too much about what was said in some presentations, but that does mean there’s a fairly open and robust debate about tax policy, and that is helpful.

Topics on the first day included the implications of the new 39% tax rate, Inland Revenue’s compliance programme (which actually referenced last year’s podcast episode with Andrea Black on the topic), the Taxation of Property, Digital Services Tax, and Anti Avoidance.

Now, last week I said I foresaw issues around actions being taken ahead of the increase in the 39% tax rate. And what was said at the conference has reinforced my concerns.

For example, people will need to look ahead and consider carefully how a change in a shareholder employee’s salary will look to Inland Revenue.

The general consensus, by the way, was that paying dividends before the 31st March year-end should be OK. But I was one of the sceptics because my view is Inland Revenue might ask “You paid a very large dividend last year. Why didn’t you pay a very big dividend this year when you could.”  So all that remains to be seen.

But there’s also a point I hadn’t previously considered. There’s also potentially going to be some very adverse FBT implications if employers are not careful.

This is because the FBT rate will also increase from 49.25% to 63.93% for those receiving benefits who are earning more than $100,000, actually some $132,000.

There’s a risk, therefore, that an employer may apply the new rate to all employees with vehicles rather than just those earning above the threshold. What that means is, there could potentially be some quite significant overpayments of FBT. The problem is managing FBT is very complicated. There’s the matter we’ve talked about previously about what is a work-related vehicle, for example.

But leaving that aside, how you actually go about applying the relevant rates of FBT is complicated. The FBT rules have been around relatively unchanged now for 30 odd years, so as one presenter said it’s probably time to have a closer look at these rules apply and operate.

Inland Revenue intervenes earlier

Moving on, applications for the COVID-19 resurgence payment went live on February 23rd. Now as of 7.30 Thursday morning, 9,500 applications for a total of $28 million had already been received and Inland Revenue had disbursed $6 million. The Commissioner of Inland Revenue and the Minister of Revenue in his opening remarks, both praised the efficiency of the new Business Transformation programme, which has enabled them to deliver very quickly things like the COVID-19 Resurgence Support Payment.

Now, I don’t think the Commissioner will mind me revealing that Inland Revenue had also already picked up what they considered a number of clearly fraudulent applications for the COVID-19 resurgence payment. So clearly the real time data enables them to deal with these applications very quickly, but also identify much more quickly where there’s something wrong.

Inland Revenue looks at ‘wealth’

The new Minister of Revenue, David Parker is also the Associate Minister of Finance, a continuing role from the last Government. Last year in his role as Associate Minister of Finance, he asked Inland Revenue and Treasury to undertake an analysis of wealth in New Zealand. And the report that was prepared for him in August 2020 was released as part of a story on Thursday.

The headline in the paper was that the wealthiest New Zealanders’ average tax rate was 12% on their total income. For this purpose income means all economic gains, including for example untaxed capital gains.  Inland Revenue and Treasury’s definition of the wealthiest New Zealanders means anyone with net wealth exceeding $50 million dollars or more. The report noted that once you included all economic gains then 42% of this group were paying a lower tax rate than the 10.5% starting income tax rate on the first $14,000 of income.

Now, there’s quite a lot to digest in this report and the related fallout is already quite widespread. On Thursday I finished up speaking to Radio New Zealand’s The Panel on that matter and also to Stuff about it. This is just another instance of the ongoing debate around the taxation of capital. Now, the taxation of capital wasn’t a topic that appeared on the International Fiscal Association’s conference this year, but I imagine it will be at some point.

There was a paper on property taxation presented by Young IFA (one of the presenters of which included another previous guest of this podcast, Nigel Jemson.)The presenters were basically saying the taxation of property is an issue we’re going to need to think about changing, and offering up some options.

But one of the things that this survey highlighted is something that I’ve mentioned previously, and that’s we don’t actually have a lot of very good data in this area. The work that was done did included extrapolating data from the NBR’s Rich List along with data from held by the Reserve Bank of New Zealand and income included in tax returns.

There’s an ongoing controversy about the level of taxation paid by the wealthy.  This is slightly distorted by the fact that the wealthy have investments in companies both listed and in their own trading companies. Now, those companies have paid tax imputation credits, but they haven’t distributed them. So there’s a latent amount of taxes which has already been paid and a second layer of tax representing the difference between the company tax rate of 28% and the personal rate will then kick in when the dividends are paid out. An interesting point of note is the top one percent in New Zealand apparently owns close to 70% of all listed companies on the stock market. Their portfolios are obviously much more diverse.

A distorting differential

And this differential emerging between the company income tax rate of 28% and the top individual tax rate of 39% was something that was discussed at the IFA conference. But another presenter pointed out something that has been going on for a long time, and that is if you look at the distribution of taxable income and what you do see is a bell curve with two big spikes and those spikes are around $48,000 of income, which is when the tax rate goes from 17.5% to 30% and around $70,000 when it goes from 30% to 33%.  What’s more these have been in the system for some time.

And it was this which prompted me to say that there does appear to be some income manipulation going on in the self-employed sector. There’s one estimate provided recently to the Tax Working Group which said that the self-employed may be paying 20% less on average relative to someone earning income subject to PAYE.

So there’s going to be an ongoing debate around the taxation of wealth. There’ll be focus, obviously, on the extremely wealthy and we need to know more about what wealth they hold and how it is held.

But we might also see Inland Revenue start to look at this issue of who is reporting income around the $70,000 threshold. It’s quite conceivable, in fact, that people will not do too much around the increase to 39% for income above the $180,000 threshold because it’s obviously going to draw attention.  However, the evidence seems to be that some manipulation has been going on at lower levels of income without attracting too much attention from Inland Revenue and that may change.

And on that note, 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 week Ka kite ano!