My guest this week is Matt Edwards, the CEO of tax pooling company Tax Management New Zealand (TMNZ). Morena Matt, welcome to the podcast.
Matt Good morning, Terry. Thanks for having me this morning.
TB Not at all, our pleasure. Now you’ve just celebrated your first year as CEO of TMNZ, but you have a quite an interesting background. Prior to joining TMNZ what were you doing and what insights did you gain from?
A 12-month OE which lasted 20 years…
Matt So it’s an interesting story, Terry. I was born in New Zealand and went to university in New Zealand and after I thought I I’d had had enough of small-town Wellington, which is where I grew up I got on an aeroplane and went over to the UK for a 12-month getaway I suppose you’d call it, and 20 years later I I came back, which is which is how it panned out.
I spent the majority of my career involved in what we call Fintech, so that’s basically the intersection of financial services and technology. During the time I was in the UK, I built a couple of fintech businesses, the biggest one was a marketing services business actually that connected financial advisors to customers. So that was a very fun journey and that was going back, gosh, we started that business in 2010, I think.
So that was a little while ago now. And this was when Internet and Internet services were not brand new but still emerging a little bit. So, we were kind of on the cutting edge of that.
I sold that business to private equity five years later or so and then I got involved in running and developing portfolio businesses for private equity. The last business I was involved in, in the UK was actually a life insurance business. We were reimagining the way life insurance is bought and sold and consumed by the end user.
So, yes, most of that time has been spent taking technology and putting it into legacy businesses and seeing how we can make those businesses more efficient. So now I’m finding myself involved in tax and tax pooling, which is arguably a legacy business, having been around for 20 years.
TB Yes, that’s the surprising thing about tax pooling. It seems relatively recent, but it’s now over 20 years old. Your career is interesting because you’re not coming from a tax background. On the other hand, TMNZ’s founder Ian Kuperus and its previous CEO, Chris Cunniffe both worked at Inland Revenue. But you’re coming with a different perspective, so I’d be interested to hear more about that and how you build on this legacy system. But just as a quick recap, what is tax pooling and how does it work?
What is tax pooling?
Matt What it fundamentally is, when you when you boil it down, it’s a pool of tax sitting within Inland Revenue that has obviously been paid in at particular day. It’s used for provisional tax payments, and what that pool allows us to do is essentially in very simple terms, move tax payments around.
So, if your business has overpaid on a provisional tax payment and another business that’s underpaid on that payment, we’re able to essentially swap those payments around. So, what that means is the business that has overpaid benefits from a slightly higher use of money interest rate on that. And the business that has underpaid avoids some penalties and use of money interest for the gap between the dates they’ve paid, and that pool is significant.
From a TMNZ point of view, our pool can be as high as $10 billion and there’s other competitors in the market that do tax pooling as well. So you’re talking about a significant amount of tax that operates under the pool. Well into the multiple billions of dollars, so that’s at a very high-level what tax pooling is or how it works. Once you get into the detail, it becomes some more complex obviously.
TB But just to clarify for listeners, you don’t actually hold that money, you and all the other tax pooling companies do not have $10 billion sitting in your bank accounts or accounts, and Inland Revenue gets notified that those payments are going across so they can see your balances and who has made payments.
Matt Yeah, that’s right. It operates under a trust arrangement, so TMNZ or other tax poolers don’t actually physically touch any of those funds. They go via a trust arrangement and then they go into the Inland Revenue pool. So no, unfortunately we don’t have $10 billion on our balance sheet, although that would be lovely if we did.
TB Indeed. Actually, a key point about it is, if you’ve paid into a tax pooling account, one of the other advantages is you can withdraw those funds at any time. You do not need Inland Revenue’s permission to withdraw the funds, so that gives a bit of flexibility.
The benefits of tax pooling
Matt Yes, while the money sits in the pool effectively you can think of that as quasi liquidity for the business. It can be withdrawn at any time and the interesting thing about it is there’s no cost implication other than perhaps a very minor bit of administration from a business to use the pool, whether they require tax pool and products on the end of that or not.
This is interesting because when you look into the market, you’d expect when you look at tax pooling that every single business in New Zealand would make all their tax payments via the tax pool, because there’s no downside. The interesting thing about it is for an industry that’s been around for 20 years. there are still thousands of businesses out there that are not using tax pooling and we’re not paying their tax via the via the pool, which is quite surprising when you consider that there’s absolutely no downside for a for a business to use it.
But you you’re quite right, you can pull that money back out of the pool at any time, and there’s various mechanisms for doing that. But if needs be, yes it can be drawn back down out of the pool.
TB Yes that is true. This sounds so completely strange. Why would we do that? And I think there’s always inertia. Well, you know, the old accounting matter, what did we do last year? Look at what we did last year, and we’ll do it again this year.
TMNZ was the original tax pooling company, but you have several competitors in there. Still from what you’re just saying, the market is not saturated so to speak, there’s plenty of scope.
So why doesn’t everyone use tax pooling?
Matt No, and what’s interesting about the tax pooling industry is when you explore the stakeholders that are involved – you’ve got your taxpayer, obviously you’ve got your tax filing company, which in my instance is TMNZ and you’ve got your accounting services, and you’ve got Inland Revenue – there’s absolutely no downside to any of those stakeholders in the process.
So, everybody is a winner, and I think you’re right, Terry. I think It’s inertia. “Hey, we’ve never done this. We’ve never paid through the tax pool. Why would we do this?”
It’s nuanced to sort of understand why would I do this? I have a tax bill. I pay that to Inland Revenue. That’s how it works. And I think the other challenge you have is quite often from an advisor if they’ve not been engaged to a level where they’re able to provide advice on using tax pooling or an efficient way of operating tax payment, they’re probably not telling their client that.
So it is an inertia thing and it’s really interesting because in my experience, typically by the time a business model gets to 20 years old, you know you’ve reached the top of the bell curve. At the moment, the market is not saturated and you’d expect that most people who it’s applicable to would be using it. And it’s just simply not the case with tax pooling. There’s still many, many businesses out there that aren’t using it. From my point of view, that’s super exciting, because it means there’s a great deal of market out there that’s to be captured.
Using tax pooling beyond provisional tax
TB Yes, indeed. Now primarily tax pooling developed around provisional and terminal tax, particularly. And as you said, the key thing to understand is this arbitrage between the use of money interest Inland Revenue will charge and late payment penalties which I think frankly is a little rude
But if you’re charging 9.89% interest on overdue debt, then for the largest taxpayers such as the banks or the New Zealand Superannuation Fund their cost of funds is way below 9.89% and so they have the real problem of saying “we underpay our tax, we get crippling interest, but if we overpay our tax, we have no access to the funds.”
So, those taxpayers are very keen users and probably in every sense of the word, your biggest customers. But tax pooling has developed beyond provisional and terminal tax, hasn’t it? You can actually use it for other taxes, including GST for example. In what circumstances can you use tax pooling for those other taxes?
Matt If you’ve got funds in the tax pool you can use those funds to pay any of your standard corporate taxes that typically wouldn’t be used to pay a social tax. But in a business context you can use pool funds to pay any kind of tax.
So, if you’ve got $100,000 sitting in the pool then you can use this to make a GST payment. Having said that, you can’t take advantage as you described it of the arbitrage or the advantage and penalties and interest payments with other tax types.
So, if you’ve missed a GST payment and you’re incurring a penalty and interest against that, then tax pooling and won’t help you in that situation unless it’s a reassessment.
Tax pooling and reassessments
Matt So under a reassessment (assuming that you’ve acted reasonably and responsibly, and you’ve filed your tax returns appropriately) because there’s been a mistake made, there’s a calculation error, an advice error – in that instance you can use tax pooling to mitigate what those penalties and interest payments would be under the under the reassessment situation. But generally speaking, the tax pooling regime is focused on income tax or provisional tax payments.
TB I’m just talking about reassessments; that’s quite an important thing because that’s happening all the time. For example, Inland Revenue just recently trumpeted how it has raised over $900 million through reassessments. That’s where it really comes in handy, and you’ve got tax going back for quite some time
Matt The truth is we’ve got tax going back to 2007/2008 and the tax pool, which is a fascinating thing, when you think about it, should fall into a reassessment situation going back considerable amounts of time when you consider the interest implications over the course of seven or eight years. This could be significant in those situations.
TMNZ’s unique selling proposition
Matt The big USP we have being the incumbent is because we have tax going back that far. It’s highly likely that we can do something should you fall into that kind of reassessment situation and that interest is compounding on what’s owed. Over time, it’s obviously becoming a big number.
These are obviously not everyday instances, but when they do occur, they can have significant impacts on savings for the businesses involved.
TB Can you put that in context back in 2007/8? I think use of money interest rates reached a peak of 14.24%. So, if you’ve got something from there, you’ve been a very naughty boy. But as you say the savings would amount to tens of thousands of dollars.
A surprising fact about TMNZ’s customers
Matt Yes, they can be hundreds of thousands of dollars depending on the circumstances.
That’s also what’s interesting, Terry. You may have been a naughty boy or a naughty girl of course. But you know, I reviewed the stats on reassessments and when you look at it, and don’t quote me directly on it, but 65% of reassessments through Inland Revenue come from technical mistakes. They don’t come from someone trying to game the system or not pay their tax.
A better way to put that is, it’s compliant taxpayers that have made a mistake. Either because of the advice they’ve been provided, or they’ve simply made a mistake.
In that situation, where you’ve got a compliant taxpayer, a mistake has been made that goes back a number of years, which has a large implication from a cost point of view on that business. It’s brilliant, then, to be able to save some money across it because they really don’t deserve to be aggressively penalised in that situation, I suppose.
TB Just quickly about compliant taxpayers, that’s 65% estimate figures out in my experience. Tax is complicated and I’m perennially advising clients on the question of how our Foreign Investment Fund regime operates, it is really quite an alien concept to people who come from Britain, for example, where there is a capital gains tax regime or the United States.
The Inland Revenue has the ability to charge shortfall penalties as well as interest. But typically, in my experience, if you come forward and said “oops, my bad” only use of money interest will be payable, which is when you come in and mitigate that.
But I’ve yet to encounter many instances where shortfall penalties have also been thrown in there, and it leads on to what you’re seeing from Inland Revenue at the moment.
So obviously you get to deal with a lot of reassessments. Are you aware from Inland Revenue has the scale of those reassessments increased in the past few years?
Matt Bearing in mind that I’ve only been looking at it for the for the last 12 months, I don’t have a deep amount of data to look back into. Personally, I think the challenge for Inland Revenue now is growing tax debt.
The reason tax debt is growing is when you look at the cycle we’ve been through over the last five years – with COVID in particular that introduces a situation where businesses really don’t know what’s going to happen. There’s nothing you can compare that that to.
Inland Revenue’s post-COVID approach
Matt A huge amount of money then went into the economy to obviously booster the COVID situation which gave businesses a boom period. Really there were low interest rates and a huge amount of money sloshing around the economy.
We’ve gone straight from that to a very high-interest rate period – which let’s be honest – we haven’t experienced for decades, really. When you look at that run on very low interest rates for a long time, when you look at what those businesses have done, they’ve had COVID and then they’ve gone through this real boom period. Then it’s suddenly gone down. That’s impacted businesses, but of course they still have tax to pay from previous years.
The tax debt is growing, and I think the interesting challenge from Inland Revenue’s point of view is yes, they’ve been very clear both directly in the media and with our communications that they are in the market to collect more tax. They’re going to do more assessments. They are doing more reassessments, but they’re also juggling that against the fact that businesses are going through tough times now.
So, the challenge for them is determining between a business that’s just not being responsible, not paying their tax, and will never be able to pay their tax, and a viable business that’s just going through a difficult period and actually needs support through that period. And to be quite honest with you, with what I see, I think they have been and continue to be very good at trying to support those businesses to get them compliant again, to pay the tax and basically for it not to be a business ending event for them.
When you look at government expenditure and tax debt, or when you have a look at the budget that’s about to come out, there’s a big incentive to collect tax. I think that that IR’s approach is pragmatic Is probably what I would say there.
TB I totally agree with all of that. And just to repeat a point we often make on the podcast, if you get into trouble with Inland Revenue, talk to them. You’d be surprised at how reasonable they are prepared to be. Unless, as you say, the taxpayer has been grossly irresponsible.
Matt And I think you can separate those two categories relatively easily. But it’s surprising how many businesses are still reluctant to want to interact directly with Inland Revenue. If a number shows up on the phone, it’s Inland Revenue or it’s unknown and the reaction is “I’m not going to take that call.”
The interesting thing is though, if the number shows up on the phone and it’s TMNZ or a tax pooling solution, then the incentive to take that call and actually deal with the problem grows.
We can all play a part in this that delivers an outcome that’s best for everyone. So I think the days of super aggressive Inland Revenue – and you know some of the stories we heard in the past – those days have gone. But nevertheless, I think business owners still enjoy that friendly face of dealing with someone who isn’t ringing from Inland Revenue.
The impact of Inland Revenue’s Business Transformation
TB Yes, absolutely. COVID is a very interesting thing because looking back over this, I talked to your predecessor, Chris Cunniffe, five years ago in December 2019. Time flies but in that time, we’ve had two big events. The first being COVID, which we just talked about and clearly that’s having an impact.
But the other thing that was just happening when I last spoke to Chris in December 2019 was Inland Revenue’s Business Transformation programme. And that was, as you know, a huge project that was carried out and came in on time and under budget. How has Business Transformation played out from your perspective?
Matt Obviously, my perspective is slightly different coming in after that project was completed, I think Inland Revenue has done an incredible job of digital transformation when you frame that up under the context of the complexity that they’re dealing with and the legacy nature of tax collection. I think when you look at Inland Revenue they’ve done a great job with that.
But I think from my perspective, what’s very interesting with my interactions with them, they’re still extremely open minded and extremely motivated to continue to make their function, which is tax collection, essentially more and more efficient. And what’s super interesting about that is they very much see this now as an ecosystem place.
How do we make the tax system more efficient for everyone? And when you look at where the technology is going and our ability to connect directly with Inland Revenue and their ability to connect directly with us from a technology point of view, there is the potential to make the function of collecting tax easier, more efficient, less burdensome and costly for business.
The potential there is still significant and that excites me because that’s really what I do and what I enjoy doing. But what probably excites me more is Inland Revenue’s openness to actually pushing this further and further. And the fact that they accept that it is an ecosystem, especially from a technology point of view.
And if we work together on that, we can really make a more efficient system. Although the transformation project itself may be over, we continue to work with them on what I would argue is pretty exciting stuff from a technical point of view.
Liaising with Inland Revenue
TB This is where your experience in the fintech sector is absolutely crucial. You’re touching on that you would have regular contact with Inland Revenue. You’d actually be meeting the senior officials there and talking these matters through as well, because there’s a specifically dedicated unit within Inland Revenue that manages tax pooling. But apart from the people there, you’re also meeting the senior honchos.
Matt Yes.
TB And how frequent are those meetings, and what insights have you gained?
Matt Yes, we speak to the most senior officials and Inland Revenue on a regular basis. There are probably two angles that takes. One is more from a framework point of view. How can we take tax pooling and actually enhance what that’s doing for business and enhance what it’s doing for Inland Revenue?
Although I won’t go into details of that now, we’ve got some pretty interesting stuff that we’re working with now. To use tax pooling I suppose to try and help businesses through this period. I would argue that that touches closer to policy. So we speak to them regularly from a policy point of view which is very interesting.
And then we have a totally other side of the equation where we’re talking to them specifically about the technology the digital side. So, there’s two tranches there and you’re quite right, it’s quite interesting you know, without naming names, the people we speak to are the top people at Inland Rrevenue. So there’s good communication channels there, direct access and they’re very open to that, which means we can do cool stuff.
Comparisons with the UK
TB How does that compare with your experience in the UK? Did you have, or need to have such interactions with HM Revenue and Customs?
Matt No, that’s very interesting. The chances of sitting down with the executive team at HRMC in the UK and discussing this stuff from the UK context would be very, very unlikely. So, one of the cool things about New Zealand is that I can pick up the phone and speak to the Commissioner of Inland Revenue if I need to. It also means that we can do cool stuff. So that’s completely different to the environment that you had in the UK.
So yes, it’s a real upside that New Zealand has right. As a smaller country we all sort of quasi know each other which is quite an interesting difference between things in the UK and New Zealand.
TB Yes. Mind you, I think I’d take a call if I knew that person was holding $10 billion in tax.
Matt Well, that’s probably not the way we sell it, but yes, I know.
Looking ahead
TB You’ve now had 12 months under the under the hood looking around, and you’ve come from this background and clearly you’ve got things in progress. Without revealing any state secrets or anything, what improvements or changes do you think you you’d like to see?
Matt It’s an interesting perspective. Obviously I’ve come into this with completely different eyes to the people that have traditionally been running tax pooling. You know Chris and I’m sure you’ve met Ian before; you know these guys are very experienced career tax people.
I’ve come in from completely the other angle. The big challenge that I’ve thrown down is, as I said earlier in our conversation, why are all businesses not using tax pooling? Even if that is simply just paying their tax into the tax pool and then transferring that tax to Inland Revenue.
There really is no reason that all businesses shouldn’t be doing that. The fact is, when you look at it, I roughly think, 40 or 50% of New Zealand business still don’t use tax pooling in in any way.
It’s also probably worth saying that I’m agnostic as to whether they use TMNZ or another tax pooling company from a high level. I just want every business to use tax pooling because of the benefits.
So when I ask myself “well, how do I address that challenge?” This gets into the strategy off running the business. How do I help all businesses to use tax pooling. When you stand back and look at it there’s inertia in a lot of instances to actually using tax pooling.
Some of that’s technology, some of it’s a reliance on a tax advisor or an accountant being able to advise on how your business can use it. And you know there’s two things there as well. That advisor needs to be able to charge for their advice, obviously. But they also need to have the knowledge themselves, and it’s quite interesting when you look into the market. I think of tax pooling all day, so I assume everyone understands it to the level that I do.
Making tax pooling accessible
Matt That’s simply not true, even within the accounting fraternity. So the real challenge is how do we make this accessible and simple to all New Zealand businesses so they can all use it.
Now if we want to look for an analogy, if you consider a credit card, a mortgage, an overdraft facility or a bank account or insurance. Most people don’t understand the intricacies that go on behind providing those financial services. Almost nobody is going to read their hundred-page mortgage contract from end to end and analyse every point in that although maybe perhaps they should,
I don’t think we’ve got to that stage with tax pooling. From my point of view, it’s a case of how can we bring this product to market in an easy-to-understand way, where you don’t need to understand it, just like you don’t need to understand the intricacies of how a credit agreement behind a credit card actually works.
I think at the moment that’s the piece that’s missing. How do I make it easier for an advisor to take tax pooling to their client? How do I make it easier for a client to understand how tax pooling works? How do we make this more transactional? Probably what I’m saying is, I think if we can answer that question, I think we’ll rapidly see higher adoption through New Zealand businesses using tax pooling and obviously there can only be a win for business and for Inland Revenue.
Tax pooling an essential cash flow tool
TB I totally agree with that and to reiterate here, because of the flexibility tax pooling provides, it is an essential cash flow tool.
Matt It is and interestingly, when you get into it, and this is I guess, where we diverge between the way I think about it and the way I view the industry, and the way perhaps the tax advisor would view the industry, this is our cash flow smoothing tool, that’s essentially what it is.
You can almost dismiss the tax element to a level and say, “hey, you’ve got an obligation to pay money at a certain date that’s not aligning perfectly with your business model.” And let’s be honest, if you look at provisional tax payments, they’re set up under a model where you pay three times a year. There you go. Your business matches that. The reality is that there’s businesses out there that in extreme circumstances make all their revenue within two weeks. That sort of pay tax model versus the reality of your business model.
The chances of those aligning perfectly are quite slim, so it isn’t really about tax from that point of view, it’s about cash flow smoothing.
So, if you have an obligation and I can say to you, “ Terry, you can simply pay X amount per month and your obligation is settled. Or pay nothing for this quarter or pay nothing for next quarter depending on what you need.”
So that is the real USP. Save money on use of money interest, save money on penalties. These things are fundamental to what we’re doing. But at the end of the day, this this is a cash flow smoothing tool and it’s a source in certain instances of capital for business or capital at a rate that’s in most circumstances, especially in SME, that’s significantly cheaper than the cost of accessing other types of capital.
TB That’s a really significant point. How our provisional tax filing dates developed is a whole other story but the long and the short of it, it was driven very much by the big end of town and that that’s they wanted the payments to align.
Matt Yes.
TB And fair enough for you are paying 80-90% of the tax. That’s not an unreasonable suggestion to make. The thing is, you’re only 10% of the businesses and the rest of us are all in this position.
Like you said, there are businesses that have two weeks to make their money and then there are businesses where things go quiet and suddenly, ”oh, January, I’ve been on holiday. Oh, I’ve got a provisional tax payment.”
I’d be interested to know if you see a lot of requests around the January 15th payment, the provisional tax and GST is quite a quite a thump.
The problems with paying tax in January and how TMNZ can help
Matt For want of a better example let’s pick an industry. Let’s assume you’re in retail and Christmas is an important time for you. So ,you’ve just gone through that Christmas period and done a lot of trading. You’ve got a big GST payment coming up and then you’ve also got a provisional tax date sitting there. So in January it’s rough times, right?
Business has been falling through the floor because you’re through Christmas and suddenly you’ve got these two big tax payments coming, or May 7 could be another example of this.
So this is where the creativity and the ease of access is important. You’ve got GST and you’ve got a provisional tax payment owing on the back of that. So pay your GST that’s important. Always pay your GST because, and fair enough to GST, as a tax you’ve collected it’s not your money essentially, it’s Inland Revenues.
TB Always pay your GST, folks.
Matt Finance your provisional tax The rate that you pay on net finance for most businesses apart from the very top end of town is going to be significantly less than what you can use in your overdraft or short-term funding facility or however you’re funding your business. There’s a way we can smooth out that that cash flow quite significantly, and can do it at a rate that’s very, very competitive. From a business cash flow perspective, it’s perfect, instead of exiting all of that cash out of your business at one time. You remain a compliant taxpayer; and you pay a rate on that that’s very competitive compared to the other cost of capital.
But one of one of the frustrating things about the industry is what I’ve just described there. If we go out into the street and ask how many people are aware of this, the gulf is big and the number of businesses sitting out there that will using an overdraft facility that they could be paying 12/13/14/15% interest, to do this is significant.
When you think of the implications of that, in New Zealand we need economic growth. We’ve got a structure of problems in the country; we need to invest money into New Zealand. There’s a massive piece of capital that potentially goes back into the market that grows that business. The business gets bigger and employs more people, who pay more tax in the long run, so it’s a real win/win situation. That’s what excites me about it. It’s not necessarily about the provisional tax payment element of it, it’s about what this can actually do for New Zealand business.
What are the potential savings?
TB Alright. That sounds fantastic and I totally agree with that strategy. It’s sometimes a difficult sell because you’re up against inertia. But potentially what sort of savings could we be seeing by adopting that approach?
Matt It’s greatly circumstantial, Terry, obviously, so it’s very difficult to say “hey, X is the savings.” So you can’t really take it from that point of view. If you consider a very basic situation, “ hey, look, I’ve fallen behind an income tax, I’ve got some income tax owing, and I want a solution for that.”
Depending on the amount of tax, you could be saving anywhere between 15 or 25% on what the cost implication would be if you choose not to use tax pooling. If, as we discussed earlier, you’re looking at a long-term reassessment situation then, obviously those savings could be considerably and materially higher. You know you may be getting into 30 or even 40% saving on what it’s otherwise going to cost you.
The other thing as well that’s worth pointing out when we talk about savings is you’ll save money, and you know I’m a businessman. And if I save a dollar, I think that that’s a job well done.
Saving money and staying compliant
Matt So the savings will always be there. But I think the other thing that we shouldn’t lose sight over is that you also remain a compliant taxpayer. That’s a thing that we don’t focus on enough. So you save money, and you remain a compliant taxpayer. I think that’s an important thing for the business, and I also think it’s a very important thing for the people advising that business to ensure that they remain in that category.
TB I couldn’t agree more with you on that point. Often, I’ve come across situations where I’ve explained to clients “Well, this is the scenario, and this is the tax due.” We’re not tactical magicians who wave a wand and the tax bill goes away. It doesn’t. What we’re often doing is we’re mitigating the impact, explaining and bringing taxpayers up to date. More frequently than people might realise, I’m told “Well, that’s just a huge load off my mind.” People want to be compliant and they’re worried if they’re not compliant. When they hear A – we can make you compliant and B – this is nowhere near as bad as you thought it was, there’s a huge relief you can see, and the strain lifts. Particularly in the SME sector, where it’s bloody tough.
Matt And you know, let’s be honest about it, you’re involved in tax every day. I’m involved in tax every day. So we think that the whole world revolves around tax, and of course, doesn’t.
But you know, particularly in SME land, the people running those businesses, they want to focus on running their businesses. And providing whatever goods or services those businesses provide at the highest level that that they can. And that’s what they should be doing.
Access to expertise
Matt They shouldn’t be sitting at home at night worrying about death and taxes as you say. And you know, to be able to provide a service to them that takes them away from that, I think it’s tremendously valuable. And the other thing, I don’t want to plug TMNZ services too much, I think it is worth the mention that ( I don’t count myself among these people) but the people we have working at TMNZ are tax experts. So often what looks like a very complex and very difficult situation can be worked through to a very advantageous outcome for the taxpayer or for the business owners.
That’s another thing that you get as a periphery benefit of using the tax pooling regime – you get access to those skills and that knowledge as part of the service, which again I think is something that along with remaining compliant, shouldn’t be lost sight of when we when we actually look at the service that we provide.
TB Yes, you’re dealing with provisional tax regime, and even for an experienced practitioners like myself, we’re always thinking “wait, what? Oh, hang on, that’s over $60,000. Oops.” It’s fantastic to be able to talk to your team and they’ll come back and show different ways of dealing with the issue.
That seems a good place to leave it there. This has been a very enjoyable and very insightful conversation. Thank you so much for taking the time to join us. Any final thoughts?
Matt No, it’s been my pleasure, Terry. Thank you for having me on. I know that my point of view is going to probably be quite a different to what you’re used to on the tax podcast. So, thank you for giving me the opportunity. It’s also been very fun from my point of view as well.
TB Excellent. That’s been great. Well, my guest today has been Matt Edwards, CEO of tax pooling company Tax Management New Zealand.
And on that note, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.taxor wherever you get your podcasts. Thank you for listening and please send me your feedback and tell your friends and clients. Until next time, kia pai to rā.
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.
An example of that also happened this week when the European Commission lost an appeal against its decision in 2016 requiring Apple to pay 14.3 billion Euros of tax and interest to Ireland. The European Commission had ruled Ireland had given Apple an illegal sweetheart tax deal for more than 10 years.
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.
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.
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.
There are a couple criteria to meet. Basically, it’s that your cash flow has been impacted by Covid between January and July of this year and you don’t have sufficient cash available now to meet that tax cost without putting the rest of your business under undue pressure.
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
The tax problem of appointing an Australian resident executor
A temporary increase to the write-off threshold for tax to pay
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.
But anyway, the numbers of taxpayers who have entered into what we call instalment arrangements with Inland Revenue rose from 16,445 in April to 26,073 in May. And on average, the debt under arrangement was just under $18,000. So that’s nearly $800 million going under arrangement. We’re going see more of this, as I’ve said this previously.
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 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.
Chris Cunniffe
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.
