Tax News

Proposed changes to the late payment penalty regime for Child Support.

20 Jul, 2020 | The Week in Tax

  • Proposed changes to the late payment penalty regime for Child Support.
  • Millionaires want tax increases but the EU’s bite of Apple goes sour.
  • And last days to organise a tax pooling payment for the 2019 tax year

Transcript

Longtime readers, listeners of this podcast, will know that I am a long-standing critic of the late payment penalty regime which currently applies across various taxes. I see it as inefficient and not actually achieving very much.

But the worst late payment penalty regime is that which applies to Child Support payments, which is rather odd because the Government in this particular case is acting as an intermediary.

At present, if you pay Child Support late, there’s an initial penalty of 2% of the late paid amount immediately and then a further 8% of the late paid amount still outstanding eight days after the due date. So that’s a 10% straight up penalty. By contrast, if you are late paying tax, the initial late payment penalty is 5% if you haven’t paid it within eight days.

In addition to this initial penalty, incremental penalties are then applied.  These are 2% of the outstanding amount, including penalties, from one month after the due date for the next twelve months, and then 1% of the outstanding amount, again including penalties, each month thereafter from 13 months after the due date.

Now, the issue of Child Support is enormously emotional and attracts quite a great deal of heat whenever I raise the topic as no one seems entirely happy with how the regime operates.  As taxpayers, we ought to be very interested in this, even when not directly affected, because the late payment penalty regime for Child Support is hopelessly inefficient and in fact ineffective.

For example, as of January 2019, the Child Support debt was $2.2 billion dollars. Now of that, only $558 million was unpaid Child Support.  The other $1.6 billion dollars being penalties. During the year ended 31 March 2019, Inland Revenue wrote off $244 million of Child Support penalties. That was actually down from $594 million written off in the previous year.  Currently, Inland Revenue writes down 97% of Child Support penalty debt at initial recognition because it doesn’t expect to collect the debt. So, a very good question is why has Inland Revenue persisted with a regime that doesn’t work?  There’s never been a really satisfactory answer to that.

But at least this week the Government announced some changes to the late payment penalty regime. The proposal is that from 1st April 2021, incremental penalties – that is the subsequent 2 % for the first month for the first 12 months and then 1 % per month thereafter – will be abolished. This measure has been brought in as part of a supplementary order paper to an existing tax bill. It’s a welcome move.

But as you can tell from the numbers I’ve just cited, will it actually really change anything? The late payment penalty regime doesn’t seem to work to encouraging people to pay on time. And there’s still this anomaly that somehow Inland Revenue acting as an agency is entitled to charge twice the amount for late payment penalties, than it charges for people paying taxes late. That conceptually doesn’t make much sense to me.

As I said, there’s a lot of emotion around the Child Support regime so there’s never going to be an entirely satisfactory answer to the issue. But it is actually good to see some movement on a sore point.

Taxing the rich

Sir Stephen Tindall was one of 83 millionaires who signed a letter to governments around the world which concluded,

So please. Tax us. Tax us.  Tax us. It is the right choice. It is the only choice. Humanity is more important than our money.

This is part of a large and growing debate around the role of taxation and how much tax governments here and around the world are going to need over coming years.

The Greens have rolled out a proposal for higher income tax rates and a wealth tax. Speaking to Wallace Chapman and Radio New Zealand panel on Tuesday, I raised the issue of perhaps a capital gains tax or a wealth tax being on offer.

And a land tax was one of the other proposals that former Act MP Heather Roy suggested was an option. It’s one I think is certainly worth looking at, although it comes with quite a number of hooks in it, like any tax does, leaving aside the whole politics of the matter.

But interestingly, this whole question of tax reform is going to be very difficult. Apart from the politics of it as I noted, but also because for some governments, it’s going to mean significant changes to their tax system.

EU judges this week ruled that, no, that ruling was wrong and in fact, Ireland had not acted inappropriately. The European Commission had not succeeded in “showing to the requisite legal standard” that Apple had received an illegal economic advantage in Ireland.

Now Ireland, even though it was going to receive €14.3 billion, actually backed Apple in this case because they have a very low tax regime for corporates. The Irish corporate tax rate is 12.5% and Ireland wanted to keep it that way as a means of driving economic growth, very important in this pandemic world.

And so the situation shows that although on one side you have people saying, ‘You know, we’re going to need tax and we’re happy to pay more tax’, governments might not necessarily be keen to follow that lead.  And by the by, it’s often said here that we want to tax the multinationals more, but this case also showed how difficult that would be.

One of the counter-arguments that was advanced by Apple, which appears to have been successful, is that the Irish subsidiaries of Apple are not involved in creating the intellectual property behind Apple’s products, because those are all developed in California.  Therefore, the economic rationale for taxing the Irish subsidiaries more heavily didn’t exist. And that same argument would apply very much more down here.

So, there’s a lot going on in the international tax space and the OECD will continue to try and get a global consensus on the matter. But the American Treasury Secretary has torpedoed that move. And the American tech giants are obviously quite happy that nothing happens because they would be the main targets of any major changes.

Last days

And finally, a reminder that if you want to organise a tax pooling payment in relation to your tax for the 2019 income year, you have until next Tuesday 21st July to put that in place.

As part of its response to the Covid-19 pandemic, Inland Revenue extended the deadline for using tax pooling payments, effectively giving a further twelve months to pay the terminal tax for the March 2019 year.

And if you listen to the excellent podcasts I’ve had with Josh Taylor of Tax Traders and Chris Cunniffe of Tax Management New Zealand, on the use of tax pooling, you’ll know what a useful tool it is.

In order to qualify you have to have a tax pooling contract in place with a tax pooling intermediary such as Tax Management New Zealand or Tax Traders by 21st July. You must also show that in at least one month between January and July this year your business experienced or is expected to experience a significant decline (that is 30 % or more) in revenue as a result of COVID-19.

So, you’ve got a few days left to make use of tax pooling and set up a contract and payment schedule to pay your 2019 tax over time and by the extended terminal tax due date next April.

Well, that’s it for this week. I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, thanks for listening. Ka kite anō.

T

This week I spoke with Josh Taylor, director and co-founder of tax pooling company Tax Traders.

6 Jul, 2020 | The Week in Tax

Josh co-founded Tax Traders with Nicola Taylor eight years ago aiming to bring the benefits of tax pooling to all taxpayers. It’s been hugely successful since then growing year on year at around 40%.  Currently Tax Traders is working with over 400 accountancy firms around the country including the preferred provider for Deloitte and the tax pooling business partner of Chartered Accountants Australia and New Zealand.

Transcript

Morena Josh, welcome to the podcast, thanks for joining us.

Josh Taylor
Thanks, Terry. Great to be here.

Terry Baucher
Our lives have been dominated by Covid-19 over the past few months.  When did you realise that this was going to be much bigger than anyone was thinking at the time?

Josh Taylor
It’s a good question. I don’t know if it’s bigger than anyone was expecting. I think it got really big, really fast about the middle of March. That’s when it really started to bite for us after the OCR drop on 16th March to 0.25%

The financial markets reacted almost instantly. And that’s when it gets interesting for us as we sit between a lot of fund managers. They are a source of funding for people who can’t pay their tax on time or who are looking for additional time to pay. And what we saw as the money supply and that side of the market really started to shrink, people got very nervous. “What don’t we know? What does the government know that we don’t know?” Because an OCR drop of that magnitude, we haven’t seen that before. Where are things going?

So that’s when it probably started for us. And the intensity stayed pretty high for two to three months. I think we’re starting to see that ease off now.

TB
I mean, so you’re working fairly long hours then.

Josh Taylor
Yep. Through the lockdown from 16th March it was regular 80-90 hours a week. What it did was it threw up a whole lot more work for us. And it’s interesting looking through the emails the other day and a couple days after the OCR announcement, we had Inland Revenue call the various tax pooling companies and say, “Look, we want to get you on a phone call as an industry just to talk about what what’s happening, where we see things going. We’re mindful that some people may struggle to make payments that are due on 31st March.  We want to be mindful of that and see what we can do to help.”

This was four days later over a weekend, by which time we’d already drafted two submissions to Inland Revenue about how they could respond and what options they might be able to take through this Covid period. So, we were already churning out material for them before there was any legislation on the table or any announcement.

We were contacting politicians, multiple points within Inland Revenue and engaging with other government departments like MBIE.  So, there’s been a huge additional workload and a lot of that’s been driven around wanting to get greater certainty for our clients on the options they have.

We’ve had a situation where the money markets didn’t quite stop functioning, but it really did slow down. People are thinking “How do we manage our way through this?  On paper we know that we’ve still got good businesses, but we need to keep the cash going so that we can get through this year and out the other side.”

And so at least from a tax perspective, which is where we operate, we’ve been doing what we can. There’s been a very high workload to get that which we’ve managed now but it has been a bit of a trying time.

TB
Bit of an understatement there. I’m interested in what you’re saying about Inland Revenue and that during this time you have worked very closely alongside them to an extent you wouldn’t normally do.  It’s also interesting to hear that they were on the phone to you as an industry saying, “Hey, we can see something’s happening here how are we going to react to that?” How was it working with Inland Revenue? Because I imagine there were frequent contacts at various levels throughout the period.

Josh Taylor
You know, look, it’s been interesting with a couple of caveats. An organisation the size of Inland Revenue certainly isn’t going to speak with one voice and you’re going to have different pockets within it. So dealing with it did pose some challenges.

The front-line people we’ve been engaging with from the tax pooling side, were very responsive, very helpful, very open to ideas. We had people from Inland Revenue contacting us saying “We’d like to hear your thoughts on what we can do. We’d like to get all the ideas into the mix so we can consider what can happen.”

So, I think a lot of what we saw with the front-line staff was the best of Inland Revenue.  In talking with accountants as we do every day, their feedback was the same.  Inland Revenue got a lot of respect in terms of their willingness to remit use of money interest and provide quite favourable terms to taxpayers.

At the same time we saw some kind of challenging behaviours where very early on, Inland Revenue signaled to us there would be the ability for the deadlines to pay 2019 tax to be extended. They were aware that people had terminal tax to pay for 2019, but the legislation that was on the table wasn’t going to be sufficient to enable taxpayers who had missed provisional payments for the 2019 year to tidy that up and get a reduction in the use of money interest costs. The use of money remission legislation only applied to payments made after the 14th of February this year, so it wasn’t going to help provisional payments for the 2019 year that were otherwise not paid.

So Inland Revenue said, “Look, we think the best way for us to resolve that is by expanding the remit of the tax pools for this period”. And we had that signal to us that’s where they were heading towards the end of March, early April. But they caveated it by saying, look, we need enabling legislation to make it happen.

Now, the legislation to make that happen was passed at the end of April, but it then needed an Order in Council. It took them until the end of the start of the second week of June to get that Order in Council in place. And without that Order in Council, we were within a week of running out of time for the 2019 year.

So, although the change was signalled pretty early,  to actually get it wrapped up and tidied up, took them right to the eleventh hour, which probably created a bit more stress and pressure than was needed. I mean, we got there in the end. So that’s a big tick. But could we have got there a bit easier? I would like to think so and I think there are people within Inland Revenue who would like to think the same as well. Some things just take a bit longer. But there are probably some lessons learned there.

TB
Absolutely. Now there was a story that the tax pooling team within Inland Revenue is relatively small. What size is it now? It must have been extended to cope with the strain. It could not be doing what they did with the resources they had if the story I heard that were only two or three in that team was correct.

Josh Taylor
Yeah, so there’s a couple of teams that manage tax pooling. There’s a core team of two or three people in Upper Hutt which does the processing. And historically, it’s been that size but it’s important, I guess, to highlight the improvements from the START system that we’ve seen rolled out aggressively over the last couple of years. It’s automated a number of processes that under the old computer system were a manual process.

So in past times we’ve seen transfer backlogs because of the sheer volume of work and it’s taken maybe three to five weeks to process transactions.Now those are happening overnight, in fact, instantaneously, really as soon as we schedule a transfer, no matter how many thousands of transfers, it all happens instantly.

So Inland Revenue has really scaled up its capacity. And so, for that for that 95, 98 percent of transactions that are straight down the middle, they go through very quickly now. So, it is efficient from Inland Revenue’s perspective.

There’s a support team at Manukau which handles the exception queries. I don’t know how many people are in that team, maybe two or three people seem to be in there. Things can get a bit bogged down there depending on the complexity of the transaction. So, you could see another week or two to work things through. But Inland Revenue have been investing in their capacity in this space, which is a good news story.

TB
That’s great to hear. Now, you touched on 2019 and the data suggests there’s still a lot of people who have outstanding obligations for the 2019 tax year. So how is Inland Revenue providing assistance for those people to pay through tax pooling? What’s the story there after these eleventh-hour changes finally came through?

Josh Taylor
There’s actually some commentary on Inland Revenue’s website released on 14th April with about eight different case studies around the 2019 year.

But as I mentioned before, because of the way the legislation’s been drafted it applies for payments that are due after 14th February 2020. Now, Inland Revenue has the discretion to remit use of money interest. What that means is that if you’ve got a payment that was actually due on the 7th April, Inland Revenue can remit that use of money interest if they think you meet the criteria. So that’s classically that’s the case for a taxpayer whose provisional tax is under $60,000 and has paid their uplift on time.

Inland Revenue have been very clear though, that this exemption won’t cover a taxpayer who hasn’t paid their provisional tax uplift on time so is incurring use of money interest from the first provisional tax payment date   which was before 14th February.  It also can’t help the situation where you’re a taxpayer whose residual income tax is over $60,000 and all tax is due by that third provisional tax date.  This is either 7th May 2019 (31st March balance dates) or 28th July 2019 (30th June balance dates) and again, because those two dates are before 14th February 2020, such taxpayers are not eligible for the use of money remission.

And again, the challenge here is that for all of those taxpayers, 2019 was a profitable year unaffected by Covid. But now they’re trying to pay it in a period that’s affected by Covid. And IRD, acknowledge that they are aware of the realities of business. You know, you’re paying for last year’s tax with this year’s income which is getting squeezed.

Inland Revenue needed to do something. And so, they’ve looked at it and decided the easiest way to manage is to expand the scope of our tax pooling rules and provide a different window of time for 2019 payments.  So, you’ve now got until 21st July to apply to a tax pooling company to square up any outstanding 2019 tax.

All that information’s on our website if you’re in that position.

The numbers we’re seeing suggest there is quite a substantial portion of 2019 tax outstanding. But what IRD has done here around the tax pools gives another nine months or so to pay. That’s going to be your best bet to tidy it up without incurring other interest and penalty costs.

TB
And this payment would involve your tax pooling rates of interest which are substantially lower than Inland Revenue’s 7% rate.

Josh Taylor
Absolutely, depending on how we structure it and there’s a couple of ways we can do that.  You’re looking at interest rates probably somewhere between 3 to 4 1/2%. And no [late payment] penalties added in. Again, the contrast to these rates being that if you don’t use a tax pool, you can be liable for that 7% use of money percent interest all the way back to 7th May 2019 which is obviously going to cost more.

TB
That leads nicely on to my next question.  I often tell clients about tax pooling and one of its big advantages is how it can assist with short term cash flow issues, just like we’re talking about. So how are clients using tax pooling? What happened once the impact of the pandemic became very clear? What do people do in that situation?

Josh Taylor
So we’ve seen three pretty clear examples of how they’ve used it specifically in relation to the pandemic. We’ve got a couple of examples that might be helpful and give that some context.

The first one was a large client in the forestry sector. And come the middle of March, as the financial markets started to get very constrained forestry was one of the areas, along with tourism, that felt the impact of Covid very quickly. And so for this client they had had a very profitable 2020 financial year but then coming into April forestry has stopped working.  But their mills and everything else they’ve still got going, incurring substantial overheads on a weekly basis running into hundreds of thousands of dollars.  And it wasn’t clear what their traditional bank funding could do for the sort of cash crunch that they and everyone else was experiencing.

What they were able to do is say, “Look, we’ve got about $8 million of tax that we’ve paid which is sitting in a tax pool. With the benefit of hindsight, we wouldn’t actually have paid that tax because we kind of need the money in our business now and IRD doesn’t require us to file our return until March 2021. So we’ve got a window of time where we can actually pull that money out of the tax pool and use it in our business just to keep working capital going. And we’ll repay it back into the tax pool before we file our 2020 tax return in March 2021.”

So, they contacted us. We were able to help them using what we call our Deposit Plus facility. You’ve made a deposit, but you need the money back. We were able to fund it back to them at a cost of around 3%. And they’ll repay that once they’re through this period before they file their return.  So it’s a little bit like the loss carry back the IRD introduced, except in this case, they didn’t even need to have a loss to get the money back into their business.

The next example was a commercial landlord with four shopping centres. They had a 7th May provisional tax payment. But through that period, we were locked down so the cash flow just stopped as the tenants aren’t paying them. So if the tenants aren’t paying, it’s very hard for them to pay their bills. So again, they were saying, “Look, we know we’re going to be taxable for the March 2020 year, but we don’t actually have the cash flow to make that 7th May tax payment.” And because they’ve been profitable, they didn’t meet the definition for the use of money interest remission as they were outside that criteria.

Again they contacted us and said: “Give us five months, we think by October 2020, things will be back up and running so we can pay it off then”. So, we funded this debt payment for them again at an interest rate of under 3%. The nice thing about finance, though, is that it does mean that if they get to October and things haven’t quite come right, we can easily extend for another couple of months. So, they do still have some extra flexibility there.

In the final example we saw was with self-employed and smaller tax payers who maybe only have $10,000 of provisional tax to pay. We saw a lot of them financing their 7th May provisional tax payments as well. This gave them certainty, it allowed them to say “We’ve dealt with the tax. We’ve bought ourselves some time to get through this cash flow crunch that we went through during lockdown once we’re through that period.” And you know, for some people it’s three, or six months and for  others it’s a bit longer. But it helps them get through this period and then they can deal with the tax once the cash flow starts to move again. So these are the sort of examples of what we’re seeing going on.

TB
Fantastic. That really demonstrates the flexibility of tax pooling.  Now you touched on the tax loss carry back scheme which has been brought in.

For some of us it didn’t seem immediately clear how it might help clients with 31 March balance dates.  In fact, tax pooling could probably come through and help out in those cases. Would you like to clarify how that could work out?

Josh Taylor
Sure. There’s a couple of areas where the overlay of tax pooling, really helps make the loss carryback regime work better. The first is obviously if you’re not already paying your tax into a tax pool, it’s a great idea to start doing that because everything about loss carry back regime is going to become easier if you’ve got your money in a tax pool as it provides you more flexibility.

The reason that flexibility is important is because if you’re paying tax directly to Inland Revenue and you estimate a loss under the loss carryback, it actually takes you out of the concessionary uplift regime. You are then into the estimation regime and you are going to be liable for full use of money interest across all your provisional tax payment dates.

Now, if you’ve made those payments into a tax pool, all that you’re doing when claiming the loss carryback is pulling your money back out of a tax pool. You don’t need to advise Inland Revenue to do that, so you can actually preserve your uplift status and still have access to your credits without losing the ability to remain in the uplift regime. So that’s the first important point.

The second one is that through tax pooling, you’re able to reinstate any overclaimed tax credits at a much lower cost. So, we would be able to talk about interest rates around 3 or 4% versus Inland Revenue’s 7% interest rate. When you’re estimating the loss to carry back, there’s obviously a little bit of guesswork. It’s not going to be an exact science. You could easily end up claiming too much and then needing to repay it. So obviously, repaying at a lower cost is better.

And finally, even if you’re not in a loss or you don’t nicely make the definition of a tax loss, you can still actually pull your money out regardless, like that forestry client I mentioned.  Looping back to your start point, Terry, because of the way these balance dates fall like you said, for most of the 31 March 2020 balance date taxpayers Covid was a significant hit for maybe a week or two of that year. So I wouldn’t expect too many people to be in a loss for the March 2020 year or if in the worst case of it would be a very small loss.

Now, the temporary loss carry back lets you offset a loss in one period against the profit in the prior period. If you’ve got a small loss in the March 2020, you can claim that against 2019. But a small loss isn’t really helpful for you right now because a small loss is only going to mean a small amount of money back in your business. What you need is a big amount of money back in your business right now. So that’s not going to be that useful.

If you had a profitable 2020 and then you’ve been looking at 2021 in estimating the loss, it’s hard to know exactly what 2021 is going to look like. Now we’re talking to a lot of people. One retail client did three months’ worth of business in the last month.  So, you know there’s some interesting dynamics in the market at the moment. Could be a loss, might not be a loss. You know, again, if you end up claiming too much, you’re then going to have to pay it back anyway. So although it’s a good idea having the loss carry back, I just don’t think it’s going to be a silver bullet.

TB
Yeah, that’s my thoughts on it. I think it’s something we do need in the system, but right now it’s a bit of a head scratcher as to exactly how it will work.

So, what are you seeing now? I mean, there the 28th June provisional tax payments have just gone through.  What are they like compared to previous years?

Josh Taylor
I was just looking at those numbers. And what we’re seeing are two stories going on. If we look at some of our clients, the payments they’re making this year are almost unchanged from what they were making twelve months ago. So that’s their part of the economy sailing through relatively untouched by Covid.

Then we’ve got the other half of it who are taxpayers who are very much impacted. And the ones we’ve seen, particularly around the construction sector where they were paying provisional tax last year, they’re not paying tax this year.

So, there are these two stories going on. And I think what we don’t know yet is just what the overall weighting of the economy is. Are we seeing half the economy going the same as it always has, and half the economy is very much impacted?  Or is 70% of the economy is going along fine and is it 30% that’s impacted?

From what we can see, we don’t have enough data to be able to make a judgement call on that. But the pleasing thing to see is there is a reasonable portion of the economy which does seem to be continuing on relatively unaffected by Covid. So hopefully that can help provide a carry through momentum.

TB
Let’s hope so. Well, I think we’ll leave it there. Thank you very much, Josh, for coming on. So that’s it for this week. Thank you again to my guest Josh Taylor of tax pooling company Tax Traders.

I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. Until next time have a great week. Ka kite āno.

Inland Revenue has released five COVID-19 related variation determinations including ones covering look-through companies, bad debt write-offs and tax pooling

22 Jun, 2020 | The Week in Tax

  • Inland Revenue has released five COVID-19 related variation determinations including ones covering look-through companies, bad debt write-offs and tax pooling
  • The tax problem of appointing an Australian resident executor
  • A temporary increase to the write-off threshold for tax to pay

Transcript

This week, a roundup of several useful COVID-19 related variation Determinations released by Inland Revenue, a reminder to be careful about who you choose to be an executor of your will, and a temporary increase in the write off threshold for tax to pay for PAYE earners.

As part of the response to the COVID-19 pandemic, a specific discretion was introduced into the Tax Administration Act to make clear Inland Revenue’s ability to issue variations to requirements under the various Inland Revenue Acts. Basically, the conclusion was that Inland Revenue needed more discretion to be able to extend the filing date, due dates for tax returns and various other filing requirements.

This was part of one of the first earliest pieces of legislation enacted in April. Following that, Inland Revenue has now used this discretion to issue five Variation, Determinations, setting out the requirements for when it would apply its discretion in certain situations.

The first one deals with a variation to extend the time to file a look-through company election. Now normally, that must be done by the start of the relevant income tax year i.e. 31st March.   This variation now extends the deadline to June 30th  2020, which is a welcome little addition.

Look-through companies are tricky elections at times. I’ve been involved in several cases where elections have gone missing or somehow weren’t filed at the right time. And that ends up with a lot of finger pointing everywhere. So under the added stress of a COVID-19 pandemic, this added flexibility from Inland Revenue is good to see.

Another variation varies the time to make an election, to spread back forestry income, and a third extends the time to make an application to change the GST taxable period. For example, you might want to switch to filing monthly GST returns from previously filing six-monthly or bi-monthly GST returns.

But the next two variations are probably of most relevance in these interesting times. The first one is variation COV 20/04, which extends the time for writing off bad debts. Now, basically under Section DBI 31 of the Income Tax Act, a debt must be written off as bad in that income year. So normally for the year ended 31st March 2020, if you’ve got a bad debt, you must have written it off by 31st March 2020. What this determination does is extend that write off period to 30th June. It’s a useful concession, although as always, there’s a couple of caveats here.

Firstly, that the person did not write the debt off by 31st March 2020 because of the COVID-19 impact.  In other words, the disruption to their processes meant they weren’t able to process bad debt write offs as they would normally have done so. And the second one is one I think is going to cause a few headaches, because it gets down to significant interpretation.  In writing off the debt, the person can only take into account information that was relevant as at the end of the 2020 income year. I’m not sure exactly what was meant by “relevant” here? You might be aware that a business was struggling but hadn’t decided to take action. Would that count? We don’t know. I suspect this is one of those caveats that’s been put in more as a protection. But we could see in a few years a significant tax case on the issue.

And the final variation, which is going to be helpful, is one that extends the time for using tax pooling transfers. Now, regular listeners will recall that I had a podcast session with Chris Cunniffe of Tax Management New Zealand late last year. Using tax pooling companies like TMNZ extends the time through which you can make payments of provisional and terminal tax, yet be deemed to have made the payment on time. So they’re a very useful mechanism for managing cash flow and minimising the impact of use of money interest.

Now, what this determination does is it extends the time for which a person can put in place a contract with a tax pooling company in order to meet the tax due for the 2019 tax year. And that time would normally have expired by now. But this variation gives an extension until July 21st 2020.

The caveat in this instance is that between January 2020 and July 2020, the business must have experienced, or for June and July 2020, be expected to experience a significant decline in actual predicted revenue. As a result, they were either unable to satisfy their existing contract for 2019 tax or they weren’t able to set up/enter into a tax pooling arrangement with a tax pooling company.

The “significant decline” in actual revenue has got to be at least 30% and must be COVID-19 related.  So that last criteria is a little bit vague because it doesn’t address a position where the company was struggling to make the payment before COVID-19 turned up anyway.

The variation gives an extra month until July 21st to put a contract in place to make a tax pooling payment. And the advantages of using tax pooling are saving use of money interest and late payment penalties because the tax is deemed to have been paid when it was due. And the rate of use of money interest charged by tax pooling companies is lower than that charged by Inland Revenue.

Instalment arrangements and use of money interest

The rate of use of money interest popped up in a story on Thursday.  It talked about the arrangements Inland Revenue is putting in place with taxpayers who have been struggling to meet their liabilities. And some of the taxpayers putting arrangements in place have also experienced the impact of use of money interest and late payment penalties.

Interestingly, Inland Revenue is waiving much of these interest and penalties if the delay is down to COVID-19. But again, as a caveat, only if it’s down to COVID-19.  I think at some stage we may find is a hardening in the approach of Inland Revenue here.

Now Inland Revenue has lowered its use of money interest rate to 7% but it’s significantly higher than the 0.25% Official Cash Rate. I suggested in the article that it was well past the time late payment penalties were abolished.  These apply in addition to use of money interest and add another 1% immediately, then a further 4% if it’s not paid within seven days, and then continue at a further 1% per month thereafter. There’s no evidence late payment penalties encourage any prompter payment when compared to other jurisdictions that don’t have them.

Currently about 87% of taxes are paid on time under the current regime.  There’s little evidence late payment penalties make any discernable difference to prompter payment.  They just cause resentment and a 7% use of money interest rate is a very substantial deterrent in these low interest times.  We’ll see when things settle down a bit if there’s finally some movement made in this area.

Beware your choice of executor

Moving on, one thing about tax that keeps me busy is the accidental tax impacts of sometimes quite apparently innocuous decisions. And one such example that I’ve come across recently is appointing an executor who is resident in Australia.

This seems fairly straightforward. You may have a parent here in New Zealand with three children, one of whom lives in Australia and the other two here. Under the will the parent appoints all three as executors. This is not an uncommon scenario.

Problem is that the Australians view a trust as being tax resident in Australia if any trustee is resident in Australia.  And as I discovered recently, this also applies to personal representatives or executors of the states. You have a deceased estate of a person who died here in New Zealand. All the assets are here in New Zealand. But in the scenario I outlined earlier, one of the children who is an executor lives in Australia.  This is currently sufficient for the Australians to consider the estate to be an Australian estate and therefore taxable. How exactly that is enforced is not clear, but this position is a very real risk.

So, here’s a reminder for people who may be considering wills in these uncertain times. Just be sure to cover off the tax consequences if it so happens you have someone such as a child you want to either appoint as an executor or make a beneficiary, who is living overseas.

Increase in tax write-off threshold

And finally, back to a COVID-19 related matter. The Government has temporarily increased the write off limit for unpaid tax for people on PAYE from $50 to $200. Right now, Inland Revenue is going through approximately two million people who are on PAYE and doing the automatic calculation of their liabilities for the year ended 31 March 2020.

The general rule was if they owed $50 or less, it would be written off. But above that amount, they’d have to pay. And what’s happened is they’ve decided as an interim measure to help people through this pandemic is to immediately increase the $50 threshold to $200. It only will apply for the year ended 31 March 2020.

This is only available for individuals whose year-end tax liability is calculated automatically.  If you are required to file a tax return, because, for example, you’ve got a rental property, you’re not covered by this change.

And by the way, just on the automatic calculation there’s an interesting thing to note here that any amount of tax to pay for someone who is paid fortnightly and had twenty seven fortnightly pay periods during the year ended 31 March 2020 is automatically written off. (The same applies to anyone paid weekly who had 53 pay periods in the year, or someone paid four weekly who had 14 pay periods).

Well, that’s it for this week. Thank you for listening I’m Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, Kia Kaha stay strong.

Chris Cunniffe of Tax Management New Zealand talks about tax pooling

9 Dec, 2019 | The Week in Tax

Chris Cunniffe of Tax Management New Zealand talks about tax pooling and the latest TMNZ/CAANZ survey of tax agent satisfaction with Inland Revenue

Transcript

This week, I’m joined by Chris Cunniffe CEO of tax pooling company Tax Management New Zealand. Morena Chris, welcome to the podcast. Nice to have you here. Now tax pooling is something that’s been around now for what, 15 years? For me and many other accountants and tax agents, it’s a vital tool in helping manage clients’ tax payments. But how exactly does it operate?

Chris Cunniffe
It’s a good question, Terry. There’s a lot that happens behind the scenes that people aren’t aware of. So let me take a moment just to paint that picture. The tax pool is one really large account at Inland Revenue. It’s got multiple billions of dollars in it because we have clients ranging from New Zealand’s largest taxpayers right down to small businesses who pay their tax through the pool. When that happens, they deposit their tax in a bank account with our corporate trustee Guardian Trust, and Guardian Trust immediately passes that on to Inland Revenue. So the money is always sitting at Inland Revenue, but instead of being allocated at Inland Revenue against each taxpayer, it’s sitting in this large pool known as the TMNZ tax pool.

We have the ability to trade balances within that pool. So if somebody has paid too much tax, they can sell their excess. If somebody hasn’t paid enough tax, they can come to us and buy what they are short. At the end of the year, when people know their liability, we transfer to their account at Inland Revenue exactly the amount that they need. And their statement at Inland Revenue will show them to be completely compliant taxpayer with the right amount of tax paid on the right dates.

TB
Fantastic. It sounds a bit intricate. But what is the big advantage for clients of using a tax pooling method.

Chris Cunniffe
So the advantages differ I guess across the client base. Ultimately, tax pooling is about managing uncertainty around your tax payments. It’s around giving people an insurance policy that if they have underpaid, somebody is there to help them out. It’s particularly about managing exposure to Inland Revenue use of money interest. I’ll come back to that in a minute. And increasingly, for small and medium businesses, it’s about managing cash flow.

So let me just go back to the use of money interest. Inland Revenue charges taxpayers at the moment, 8.35% if they don’t pay their tax on time. Now, that rate is designed to hurt them. It certainly does. Inland Revenue does not want to be a an involuntary banker where people say, oh, look, there’s a fairly good interest rate there. I’ll just pay later. So they want to have a fairly sharp interest rate that focuses the mind and gets people paying their tax on time and use of money interest largely achieves that.

But there’s  many reasons why people don’t pay their tax on time, and we’re not talking bad taxpayers. We’re talking people who have cash flow constraints, who have seasonal businesses, who have unexpected events that caused them to have taxable income that they hadn’t planned on. And for them to be hit with an 8% interest charge is kind of unfair.

So the genesis of  tax pooling way back in the early 2000s was big business saying to Inland Revenue you’re charging us at that stage double digit interest when we don’t make our payment on time  or we get our tax payments wrong. That’s usury. It’s unfair. So Inland Revenue came up with this idea that said, well what about allowing those who have paid too much to trade with those who have paid too little? And an intermediary can effect the payments.

So that’s what we do. So people will save probably 30% on the Inland Revenue interest. They’re going to charge them 8.35% We’ll be charging them a rate. And it varies depending upon the amount of tax you’re buying, the age of the tax but we’re charging around 5% to 6%, in some cases less.

TB
That’s a very significant advantage. It also means because the tax is deemed to be paid on its proper due date, you trade tax within the pool. And so not only have you reduce your use of money interest, you avoid the late payment penalties.

Chris Cunniffe
Absolutely. And there’s a 5% penalty if you’re a week late. So if you’ve missed a tax payment, tax pooling is an amazing solution.  Just an example. Yesterday we had an inquiry, somebody at a largish company. Because it was it was over two million dollars was saying, can we buy a tax payment for 28 November? And right now they’re looking and down the barrel of a 5% penalty on that. They can come to us and buy that tax and we’ll just charge them an interest rate and they eliminate their late payment penalty.

TB
Seriously for those who have not used it before this is a real life saver at times. When’s the biggest demand for your services? Is there any particular time you’d see a lot of payments going through?

Chris Cunniffe
Oh, we run a regular cycle through the year. Most of New Zealand’s largest taxpayers deposit their tax through us and increasingly small and medium businesses are paying their tax. So as you go through the year. If you think about the cycle on P1,  28th August, a lot of money comes into the pool and then again for the P2 payment on 15th January and finally for P3 at the 7th of May after which it sits there until people file their tax return.

Now, like all good tax agents, I’m sure your filing percentages are right up to date, but there are some who seem to do all their tax returns of the last week of March. That is when we get frantic at that stage. Agents are coming to us and saying, here’s the tax liability for my client, please transfer. And that’s where agents are coming to us and saying, my client’s got a problem. They didn’t pay enough tax. Can I please buy tax? So we are frantic from March through till June.  That’s our trading window.

The rest of the year it’s regular and routine transactions. Under the new provisional tax rules, interest now only applies from P3 on 7th May if people have used the standard uplift method. So most of the demand is for tax for P3 so seventh of May is the biggest date that we will sell tax for.

TB
So the changes to the provisional tax rules, they were designed to make life a lot easier  for taxpayers. That probably made your life worse.

Chris Cunniffe
We were disrupted without doubt, but I don’t think there’s a business in New Zealand that doesn’t get disrupted by competition or by technology or in our case, by regulation. Yes. And what it’s forced us to do is look at “What are the services we provide? What are we good at doing?” And looking at our client base and so. Whereas we originally existed, I guess, as an ambulance at the bottom of the cliff, “my client is short paid can I buy tax?” We have now morphed into being a cash flow and a working capital solution, particularly for small business.

So it will be no news to you – what’s the biggest issue for your clients? Cash flow. Inland Revenue is quite prescriptive. You shall pay tax on these dates depending on your balance date with no care about whether you’re a seasonal taxpayer, whether your business is growing, whether there’s any other things going on. Too often those dates don’t fit with your business needs.

So paying tax on the 15th of January, straight after Christmas and when everyone’s in shutdown mode, how dumb is that?

TB
Indeed, there’s a story behind that which can wait for another day.

Chris Cunniffe
Anyway, we increasingly have people saying, look, will you pay tax on our behalf? We could give you an example of some people who use us for cash flow. Trucking company wins a major contract. Great news. The business is going to grow. What we need is to buy three more trucks. I need to pay my property tax. Now, where’s the best use of their cash right now? It’s obviously putting down deposits and getting new trucks into the fleet. So they came to us and said, can we defer the payment of our provisional tax for six to nine months? And we said, of course you can. So, we have this product we call it tax finance and you essentially tell us I’m due to pay tax on a particular date, let’s say the 15th of January coming up. It would suit me better if I could pay that in six months time. So we will get a funded pay tax on your behalf and you pay us a fee upfront and in six months time when cash flow is strong you come back and you essentially buy that deposit out of the pool. We transfer it to Inland Revenue you’re a compliant taxpayer. You’ve paid your tax on time. So that’s one way to do that. Kind of “I know exactly what I need to pay and I want to defer it in a structured way”.

The other way is just to do it like having a revolving credit or a flexible mortgage. You say, “I know what my liability for this year is and I want to pay it through TMNZ and I’ll pay 200 dollars a week.” We had a lot of clients who do that and they just set up that automatic payment to pay it through us and we transfer it across and we work with the tax agents to make sure the tax is on the right date at the right time. But for that taxpayer and sometimes even for the agent, all that stress about whether the money will be still in the bank account when it’s time to pay the provisional tax will is  gone. We often hear agents that tell us about clients who when they get the provisional tax reminder they go “Whoops, I’ve just spent that.”

TB
Yeah, that’s fairly common. There wouldn’t be a tax agent in New Zealand who hasn’t experienced the call on the morning of the 28th August, for example. “So what’s this about paying ten thousand dollars? I haven’t got it”. I mean what are you describing here is something that anyone who works in the SME sector knows, that a lot of the legislation and processes are designed for big companies and assume a level of cash flow and capital and basic skill that just simply doesn’t exist or is not commonplace in this sector.

I mean, we’ve talked about provisional tax, but actually you can also cover GST and other taxes. How does that work?

Chris Cunniffe
We can cover other taxes where there’s been a reassessment. Where you’ve got an uncertain position, and this could either be that Inland Revenue has approached you and questioned a tax position you’ve taken or increasingly it is where the tax agent has done a review and says  “I don’t know that we got this quite right” and a voluntary disclosure is going to be made. You can come to us and buy tax at those historic dates. This is incredibly valuable. If you if you think that interest rates over the last four years have fluctuated between 8% and 9%. So take a client who has been getting a position wrong for the last four years. The interest that has built up on that underpaid tax there could be north of 30% of the core tax, so that’s quite an uncomfortable conversation to be having with your clients as you talk them into a voluntary disclosure or when Inland Revenue is putting a proposal for a reassessment on the table and then they went 30% extra with interest. This is before we even get to penalties.

We’ve got tax in the pool going all the way back to 2008. It does not matter what date your client is being reassessed for. We’ve got tax available.  Anybody who is being reassessed for any income tax or any other tax type, you should contact the pool and we’ll be able to reduce their interest costs in the region of 30% to 40%.

TB
That’s a significant help. This is a scenario we see quite a bit often around overseas income because the rules are so complex and people assume that it’s just like to be taxed at source. So, yeah, the ability to make a voluntary disclosure and get a reassessment and then use TMNZ to reduce the interest bill is very significant. In one example I can think of we saved a client $10,000 in interest by using tax pooling.

Chris Cunniffe
Yeah. And this is real money for people who in most cases were unaware that they had a problem.

TB
It’s the old saying you don’t know what you don’t know until you find out. And then it gets very expensive. So obviously, a key part of your business would be regular interactions with Inland Revenue. And at several different levels. So how does that work? There is a special unit within Inland Revenue that deals specifically with tax pooling.

Chris Cunniffe
Well, let’s take a step back. Inland Revenue created tax pooling, it was the solution to a problem that arose in the early 2000s. So we exist at the behest of Inland Revenue. So at a policy level, we have engagement with them, which is around what should tax pooling be able to be used for and how has the industry evolved? I talked about how we changed over the years. We have regular discussions with tax policy officials. Just to let them know what’s happening and make sure that, you know, they are comfortable with the settings. So that gets a gets a big tick.

And about four years ago, Inland Revenue did a review of the industry just to check that there was no risk to the system by having this industry called tax pooling.

And it came back with a very solid report, in fact one of the recommendations was this is now relied upon by so many taxpayers, you would not want to take it away.

Operationally, there’s a unit at the processing centre and on a daily basis we’re interacting with them. We’re uploading schedules, we’re saying this is who’s put money into the pool, this is people who are buying tax. Please transfer from the pool to these taxpayers X amount of tax. We do tens of thousands of transactions a year with that unit. So we work very, very closely with them.

And as you can imagine, with all interactions with Inland Revenue just around the fringe, there can be systems, issues or uncertainty about legislation. And we work through that. And that final piece of uncertainty with legislation is in a technical area at Inland Revenue that we liaise with and there’s a regular liaison between Inland Revenue and the industry to ensure that issues are running smoothly. We pay a massive amount of New Zealand’s provisional tax.  TMNZ would be the largest taxpayer in New Zealand. If you think about our account at Inland Revenue with multiple billions of dollars in it. So there’s a an investment on both sides to make sure that this runs efficiently.

TB
Yes, the tax pool has at any one time six or seven billion dollars?

Chris Cunniffe
It can get well north of that  when is all the money comes in. And then as it gets transferred out, the pool drains again and then we fill it up for the for the next year. But it’s in the multiple billions of dollars.

TB
I understand included amongst your clients is the New Zealand Super Fund, the country’s single largest provisional taxpayer, with a billion dollars plus regularly. So it’s dropping 300 million at a time every provisional tax payment.

Now we’ve got a provisional tax payment coming up on the 15th of January. So now tax agents like you will be looking out to our clients and telling them what’s going on. But as you know the rules, 105% or 110% of RIT [residual income tax] are confusing.  I think you’ve got a specific tool to help tax agents like myself and clients calculate your RIT and your payment.

Yeah. A couple of years ago, Inland Revenue looked to simplify the provisional tax rules to take the heat out of the use of money interest by saying if you pay your first and second installments based on an uplift to prior year returns, then there’s no interest. That’s good for business, but they’ve created a level of flexibility and an optionality in the system that has actually now started to confuse people. As you say, should it be 110% of two years ago or 105% of last year? Have I filed my last year’s return or not? It starts becoming quite a complex calculation. So we’ve created a calculator on our website which allows agents to enter the details of their client’s prior tax positions. And it will come up and say this is how much tax should be paid on on each installment date. And so that’s become very popular with agents. And they tell us it is now a core part of their provisional tax process in terms of advising clients.

TB
Excellent. Yes, even for someone who’s been like myself working for 25 years or more, provisional tax every now and again, I just go back and say “Wait a minute. What applies here? Do we file a return or not file a return?”  It’s all sort of needless complexities and confusion. So it’s always invaluable the assistance we get from yourself.

Chris Cunniffe
And again, that’s the advantage of the pool is that you can kind of pay what you think you owe. But if there’s overs or unders at the end of the year, you can work with us to smooth that out. We shouldn’t be stressing before Christmas about provisional tax.

General satisfaction with Inland Revenue engagements well down

TB
Yes, but we have to. Now a big part of your daily routine is interaction with Inland Revenue. And in recent years, you actually started conducting an annual survey of tax agents views about satisfaction with Inland Revenue. And the latest iteration was released at the Chartered Accountants Australia New Zealand tax conference that I was at two weeks ago. Now, this is a fully professional poll carried out by Colmar Brunton. And how did,  what was the survey’s results?

Chris Cunniffe
That’s right Terry. We have run the survey for the last nine years in conjunction with Chartered Accountants Australia New Zealand. It’s designed to elicit feedback from agents or tax professionals generally about how their engagements with Inland Revenue have gone. I guess the key out-takes from this year [is] it has been a tough year and the general satisfaction on Inland Revenue engagements is well down.

Let’s take a step back and think why that is though, and acknowledge that Inland Revenue have just implemented probably the single biggest technical or system transformation in New Zealand history with millions and millions of accounts for taxpayers being moved from the old FIRST system to the new START system and the movement of that data went without a hitch. Unfortunately, as  happens with all major transformations around the edges, there’s a few challenges and these played out and all agents will be aware of these if they think back to what life was like between April and July this year.

TB
We’d rather not.

Chris Cunniffe
Yes, the auto refund, they thought this was a good idea, but in many cases the money was sitting with Inland Revenue for a damn good reason and the agents knew why it was there. And if you take it back to first principles, agents know their clients’ tax affairs and should be trusted to manage them. The getting  hold of Inland Revenue on the phone became a nightmare. Correspondence slowed down – mixed views on this – but they stopped doing audits. So if your business consisted of advising taxpayers through audits, that was a bad thing as all the auditors were pulled in to answer correspondence.

The survey showed that the overall satisfaction with Inland Revenue has been declining since 2015, which corresponds with this massive transformation change they’ve been going through. It’s now at 66%. It had been right up into the into the 80s.

People in public practice are the ones who are expressing the greatest dissatisfaction with the engagement. That probably makes sense because they deal with Inland Revenue on a much more regular basis than those in business. And to be fair, I think if you are in business, the new system is much more intuitive and much more immediate. And so, yeah, there’s a winner in that area. If you’re in practice, the frustrations we’ve talked about have come to the fore.

The dissatisfaction with phones is very, very strong. This is nothing Inland Revenue doesn’t know. They get feedback all the time. The advantage of the survey is it’s kind of like a mark in the sand and we’ll be able to track over time how they perform. We would expect that next year we should see an upturn in satisfaction with contacting Inland Revenue by phone or by for processing purposes.

TB
Inland Revenue seems, however, to be very much driving its business model to take everyone going online. And from their business perspective, that makes sense. It reduces maintaining a large call centre staff. It probably would be comfortably the largest in the country by a long way. I remember one time hearing from a person at Inland Revenue who had handled a call centre for a bank. And the one thing he hadn’t realised just was what was involved –  whereas for a bank call centre, the interaction was designed to be kept to two minutes or so. But for Inland Revenue, basically anything goes, and that’s something that he hadn’t realised the issues around that. So the call centre issue is one I think we will want to watch very carefully how that proceeds, because the nature of tax being what it is.

And this is also a reflection of the fact that Inland Revenue is a largely trusted organisation. Understandably, people will want to talk to Inland Revenue and say “Have I got this right?” So it’s a  double edged sword for Inland Revenue. It might want to move people online, but its stature and trust within the community means it’s going to get a lot of calls. Tax agents as well want a bit of reassurance because here’s the thing. There are about 5200 tax agents registered and that would include organisations as big as PricewaterhouseCoopers, Ernst and Young, Deloitte, – the huge mega firms who have hundreds of accountants down to your sole practitioners. But the majority are sole practitioners. And it’s lonely out there. And we carry the can if we get it wrong. So every now and again, it’s nice to have a voice at the other end who said, yep, that’s right or no, you need to do it differently.

Chris Cunniffe
It’s a very good point. And there’s a real point about what is the psychology of engaging with your regulator.  Clients in particular are worried when Inland Revenue contacts them. They think, have I done something wrong? So there’s a there’s a real fear. And Inland Revenue has invested a lot in trying to show off a friendly face. But they still are a regulator. Tax is a really big issue for people. It’s not something that they feel qualified to do. And the stigma and the consequence of getting it wrong is significant penalties and interest.  For an agent you wear that because if you have advised your client and got it wrong, the client is pretty grumpy and would expect you to be responsible for the consequences.

So I agree there is a need to be able to get the right assurance and the right level of engagement where appropriate. On the other hand, a really good system design would say we make it really hard for you to get it wrong. We give you all the easy and all the basic information you need. The most popular question asked of Inland Revenue call centre staff is “What is my IRD number?” There’s an engagement if they can get rid of that, you would free the staff up to answer the high quality calls where there is genuine uncertainty and people do need to be guided. So Inland Revenue  has got that challenge. But I think it’s essential for agents in particular that when there is uncertainty, they can talk to somebody and figure out what’s going on. So getting that service available and an effective fit for agents, I think is a top priority for Inland Revenue.

TB
Yes. That’s an amazing thing. And people ring up asking “What’s my IRD number?” That’s going to be a very circular conversation. I think education is going to be very important about people understanding the system, and that’s everybody. I think the classic example this year, it’s emerged, is a one and a half million people got their prescribed investor rate wrong either under or over. So there is something where everyone needs to work out. There was an assumption that people knew more about this, were watching it regularly, and there was an assumption that because of the auto default rate, Inland Revenue and the KiwiSaver funds were all getting it right. So everyone was sort of assuming everyone else was looking after what they should have been looking after and of course, it landed up in a big mess in the middle.

So, yes, Inland Revenue is still going to have an educator role. I think in many ways it probably needs to be putting more resources into that. We run a self-assessment system, which means we’re supposed to know and assess our own position. But even though our tax system is widely regarded as one of the more conceptually straightforward in the world, you get around the fringes of GST or the financial arrangements regime, or even the Brightline test all those little quirks in them, which keeps people like myself in business, but means that you can’t really work on a true yes, you can work out this tax for yourself.

Chris Cunniffe
It’s interesting, over the years Inland Revenue had pushed away the salary wage earner, the man or woman in the street. “You didn’t need to file tax returns”. So a lot of people were totally unaware of how Inland Revenue works, how your tax system works. And that leads to things like when you are asked by your bank or by your fund manager, what is your tax rate? People are kind of oblivious to this. It led to the expansion of the tax refund companies charging for a service that anybody themselves could have done online, but people just weren’t used to being in the tax system that the new platform now brings people in a lot more.

And the interaction with investment income and with PR, they have lifted a rock and found out there’s actually quite a lot under there. That was everyone was oblivious to it – be it by design or by accident. People were on the wrong rates. I suspect that’s an example of something that wasn’t really thought through particularly well. It should take us a period of time to get it right before going forward it will be set and forget. But you’re right, there’s a number of other places where people get drawn into the system. So the bright line test, the other person who has one property, one investment property, you’re now in the system. The increased amount of information that Inland Revenue will be getting from foreign tax authorities, from the banks and from the investment funds means that they will be asking questions if all your settings are not right. So I think there’s a lot more engagement or interaction going to happen between individuals and the department.

TB
Yeah, that’s definitely coming. Definitely. And the survey was fascinating to be part of it because the Commissioner then spoke immediately afterwards, talk about the wrong warm up act. How did you think she responded? She responded to the criticism that clearly could not be ignored, but also was also looking forward. How much confidence you draw from what her summary of where things were at?

Chris Cunniffe
It worked very well that I was able to report the survey. And one of the main issues out of the survey – if we take away the what’s general satisfaction like in a year where there’s a massive transformation – the biggest gripe that’s been coming through had come from tax agents around Inland Revenue approaching their clients directly. And I think this was a philosophical thing in some ways from Inland Revenue,  “we want to talk to people that ultimately, they’re the customer. We can get there and share information with them”.

But what that was doing was frustrating agents immensely. And we got really, really strong feedback from agents, around  72% of them said Inland Revenue had gone to their clients directly and we don’t like that.

TB
Can you imagine if you’re in business – any businessman – and one of your rivals approach 72% of your clients? You could see why the tax agent community was seething.

Chris Cunniffe
Indeed, because in the feedback we got was things like ” this worries my clients needlessly” because the agent often would have it all under control –  as a GST refund about to be released. It’ll cover that liability, it’ll all be squared out and the client’s got this phone call “you haven’t paid your tax. What’s going on.”  That undermines the agent in the eyes of the client. “I thought, Terry, I paid you to look after my affairs. I’ve got Inland Revenue in my ear saying I’m in arrears. What’s going on?” It means that you as an agent have to then spend time talking to the client, calming them down. You probably can’t charge for that.

So there was a lot of needless angst. Inland Revenue has found that there were 72 letters or interaction, real written interactions going out to clients that probably should have gone to tax agents. They have worked through the system and have now re-pointed those so that they will go to the agents in the first place and they will only go to the client where the agent becomes non-compliant. Or they will go to the client directly if there’s thing’s like a change in bank account number. That’s proper, that’s an updated security check.

TB
I hate to say this, but it’s one of the more common frauds I’ve encountered where the tax agent alters a client’s bank account details that refunds go into the agent’s bank account. I encountered that a number of times. So Inland Revenue is absolutely proper to be sending authorities like that to clients as well as tax agents.

Chris Cunniffe
But what they have acknowledged now is their settings were wrong. I think it was a deficiency in the new system that they’ve got that it’s not particularly geared around the New Zealand system and the way that we use agents. It is an off the shelf system. So it has needed some adoption.

But it was getting to the stage, and Terry I know you’ve been vocal on this yourself, about Inland Revenue’s engagement with clients. You and a number of others have been very vocal about this saying “This is wrong”. And I’ve I talked to an awful lot of agents and they’ve been saying to me, is there a strategy at Inland Revenue to displace the agent, to essentially disintermediate, get them out of the system?

So I put that question at the conference and the Commissioner basically got up and her opening comment was, “Let me affirm the place of tax agents in the New Zealand tax system”, which I think was music to the ears of tax agents. She then talked through the changes that have been made and the fact that they’re kind of inverting the pyramid to say our default position is we’ll engage with the agent.  As an agent you can control this if you’d rather the client dealt with maybe the payroll or maybe that the GST, you can you can adapt adjust the settings to do that.

So look, that was a major success because the agent community felt like they were banging on the door and not being heard. And I think we finally had pulled all the strings together and I was very grateful to the Commissioner for her immediate response and the fact she stood there and said, “look, this is where we see agents. This is what we’re doing. We’ve got a strategy around it”. I’m hopeful that in a year’s time we’re not talking about this.

TB
So am I. And I think also the other thing was interesting about your survey, and this is something we’ve seen when business transformation first came along. A lot of agents I was speaking to were nervous about it “have we got a role in the future?” But the survey shows very much the feeling is, “yes, we definitely have a role in the future” and they are adjusting their business model to something which is more appropriate to an advisory client, helping clients with cash flow issues and using tools like TMNZ and getting ahead of the tax issue so being proactive rather than reactive. And the survey showed those results, didn’t it?

Chris Cunniffe
It did. And it’s been a theme that we’ve asked for the last couple of years, essentially for the reasons that you ask. I talked about disruption so that the model of doing a basic tax compliance programme where you do everything for your client is largely dead because the software companies have got to the stage where clients can do a certain amount of it themselves. How far the client goes along that that process is a discussion between the agent and the client. But you’re right,  agents are looking to move up the value curve and be less about someone who will process a set of accounts and tell you six months or nine months after year end whether you made a profit or not, to somebody who engages with you in real time around how your business is doing.

TB
Well, I look forward to seeing the survey next year. And I think that we’ll leave it there. Going to be an exciting twelve months ahead, another release coming forward. And so the commissioner reassured us about how they were managing. So it’s a wait and see. But thank you very much, Chris, for joining us on the podcast. It’s been absolutely insightful and fascinating. I really appreciate you coming over.

That’s it for The Week In Tax. Next week will be the final podcast of the year and we’ll have a retrospective on the big events of the year. In the meantime, I’m Terry Baucher, and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients, until next week. Have a great week. Ka kite āno.