17 Apr, 2019 | Tax News
In case you’ve not heard, the big news this week is the start of the final season of Game of Thrones. Oh yes, we also should hear which of the Tax Working Group’s recommendations the Government proposes to implement.
Judging from media commentary over the past few weeks “Winter is coming” would not inspire as much existential dread as “CGT is coming.” As I noted previously there’s much more to the TWG report than the taxation of capital gains. Just to recap, the group’s principal recommendations also included:
- expanding environmental taxes (an “immediate” priority);
- measures to enhance business productivity including possibly restoring depreciation deductions for buildings;
- the Government should be ready to follow other jurisdictions and introduce a digital services tax on multinationals;
- changes to KiwiSaver;
- possibly exempting the New Zealand Superannuation Fund from taxation;
- increasing the bottom tax threshold;
- more powers for Inland Revenue to address non-compliance and the cash economy;
- establishing a single Crown debt collection agency;
- considering corrective taxes such as a sugar tax; and
- reviewing the current treatment of business income for charities and verifying whether charities are achieving the intended social outcomes.
It’s a long list of recommendations which will potentially affect all taxpayers in some form or other.
But despite all of the above, attention will almost exclusively be focussed on how far the scope of capital gains will be extended.
Although three members of the TWG, Kirk Hope, Joanne Hodge and Robin Oliver do not support a broad-based capital gains tax across all assets, the entire group did back extending the taxation of residential rental investment property. As justification the report noted[1]
“the current approach to taxing rental income does not come close to taxing the expected total income from residential rental investment properties when capital gains are included.”
At the very least we should therefore expect residential investment property and second or holiday homes to be taxable on disposal. This could include lifestyle blocks but not farms (although farmers should probably expect to see the TWG’s environmental recommendations adopted).
According to the TWG’s final report the initial impact of taxing residential rental investment and second homes would be an additional $50 million of tax in the first year. However, this is expected to increase steadily reaching over $2.5 billion by the tenth year.
Apparently lost amidst the noise from opponents of an expanded CGT, is the Government’s direction to the TWG after the publication of its interim report to develop revenue-neutral packages of tax reform. The TWG’s final report suggested four alternative packages[2] costing between $7.3 and $8.7 billion over a five-year period. (Intriguingly, none of these packages included exempting the New Zealand Superannuation Fund from tax, a measure which alone would slash more than one billion dollars from the tax take). A limited expansion of CGT will mean any such packages will probably need to be scaled back.
Next month’s Budget will be the first prepared using Treasury’s new Living Standards Framework. The Government may therefore want to hold back announcing specific details regarding implementing some of the TWG’s recommendations until then.
In reality, the intention to have any relevant legislation in place to take effect from 1 April 2021 does favour a limited expansion of CGT at this point. With the general election due next year, probably in September, a bill incorporating the legislation for an expanded CGT would need to be ready by November this year. This would allow just enough time for the bill to go through Parliament enabling the Finance and Expenditure Select Committee (FEC) to hear submissions before being passed some time in June/July next year prior to the general election.
A potential difficulty for the Government is that the FEC is currently tied up considering submissions on the legislation relating to proposed ring-fencing rules. These rules were intended to be operative as of the start of the 2019/20 income year, which for some taxpayers started on 1 November last year.
The problem is that not only are the loss ring-fencing rules (unsurprisingly) unpopular with residential property investors, the proposed legislation has drawn such heavy criticism for the (lack of) quality of its drafting, that Inland Revenue has apparently rewritten it entirely. The FEC is not due to report back on the loss ring-fencing legislation until June and it could be another couple of months after that before the legislation is enacted.
Meantime, Inland Revenue is about to shut down for a week as it prepares to launch the latest and most significant stage of its Business Transformation programme. Although legislation and policy are distinctly separate from the daily operations of Inland Revenue, there is a sense that its principal focus at the moment is the Business Transformation programme. Consequently, whether it is actually ready to draft and implement significant policy changes at this time appears questionable.
The dissenters to the majority opinion did so on the basis that the policy over the past thirty years of making incremental changes to the taxation of capital has “served New Zealand well”. And another incremental change appears where we will ultimately end up. At the same time, however, as David Hargreaves observed it means “as a country we obviously don’t want to deal with the broader issues of taxation and taxing wealth.” Which as David concluded is indeed a little depressing.
[1] Para 42, chapter 5, Final Report Volume 1
[2] See table 8.2 in Chapter 8 of the final report
This article first published on Interest.co.nz
29 Mar, 2019 | The Week in Tax
- Tax Working Group’s capital gains tax is scrutinised
- We find out how much tax farmers in New Zealand actually pay
- International Monetary Fund challenges Tech companies
Podcast Transcript
Kia ora!
It’s Friday, the 29th of March. Welcome to This Week in Tax!
- The Tax Working Group’s capital gains tax proposal has come under scrutiny;
- We find out how much tax farmers really pay; and
- The head of the International Monetary Fund gives the tech companies the side-eye.
The Tax Working Group’s proposed capital gains tax proposals were the subject of a series in the New Zealand Herald this week which looked at how the proposals would affect various sectors. This is a good read because it’s also taken the opportunity to have input from a member of the Tax Working Group, Geof Nightingale who coincidentally was a member of the 2009/10 Tax Working Group.
The group looks at how the various sectors would be affected – starting with businesses, farmers which includes the farming sector, lifestyle blocks, homeowners, and investors in KiwiSaver and the like.
Now, what comes out of these is, firstly, the point is made repeatedly that gains to the date of implementation, i.e., the valuation date that they’re proposing are going to be exempt. It’s only gains from that point onwards that will be taxed, so that’s a key point for dealing with the lifestyle blocks. A good example is made there by Geof when he was talking in yesterday’s Herald.
The complexities emerge around businesses and also around investors. For businesses, there was a real issue around valuations of good will and how about rollover relief – what we call “what happens when someone dies when you’re trying to pass assets from generation to generation?” These are all issues which the Tax Working Group have looked at but will need further scrutiny if they’re going to be implemented.
The really complicated part is what happens for investors. Here, we see that the policy it adopted 30 years ago of the tax-tax-exempt approach to retirement savings which means that savings are not tax-preferred which is contrary to what happens around much the rest of the world.
You then have the current approach with the taxation regime, the foreign investment fund regime, and the financial arrangements regime. And then, you’re trying to shoehorn a capital gains tax regime into that as well. It is an absolute dog’s breakfast – or a real Brexit, as we say here – and this is an area which, quite rightly, investors in that sector are saying, “This is far more complicated than is appropriate!”
Interestingly, a couple of things spin out of this. Susan St John writing for interest.co.nz published a piece where she looked at the minority view of the Tax Working Group. Three members of the group – Joanne Hodge, Robin Oliver, and Kirk Hope – disagreed and set out their views as to why they disagreed with a general capital gains tax being applied across all sectors.
They did, however – and this gets often overlooked – support taxing capital gains of residential property investors. What Susan St John picks up is the point that was made by the minority group is that, if we wanted to tackle housing inequality, then a capital gains tax isn’t the way to go. She criticises the final report for not spending more time looking at the risk-free rate of return method. Basically, this is the method used for the foreign investment fund fair dividend rate approach, i.e., you apply a set percentage to the value of the asset and that creates the taxable income which is reported by the taxpayer. That’s not an unreasonable approach. It’s actually, in some ways, conceptually simpler.
Her point is that – and, interestingly, it’s been made by some of the opponents of the capital gains tax – is that, if applied on a broader basis, this would tackle inequality and tackle the housing problem as well as being a regular source of income for the government.
Now, also spinning out of that, the head of Federated Farmers in Marlborough climbed into the proposals, saying that (a) farmers are going to be an ATM machine for beneficiaries was one of the targets. This prompted a fairly robust rebuttal from Professor Lisa Marriott.
In writing for The Spinoff, she took a look at just exactly how much tax the farming sector does pay. This is something that has intrigued me for some time. What Lisa did is she went to the Inland Revenue, used the Official Information Act, and got details of the income tax paid by the farming sector for the year 2016/17 tax year.
Now, the total tax take for that year was $76.5b. Of that, the farming sector contributed $758m, according to the Inland Revenue. In other words, 1% of the total tax take.
Pouring with a certain amount of dry sarcasm, Lisa Marriott pointed out that this is hardly an ATM pumping money out to be distributed all around the place. Dairying only pays $223m in income tax.
Now, a couple of issues that come spin out of this, firstly, the farming sector makes a lot of noise yet isn’t actually directly paying a great deal of income tax. Its employees might be paying quite a bit of pay as you earn, but the fact that, on an estimated $758m of tax, that represents maybe $3bn of taxable profit across the sector which isn’t a lot given the size of the sector, and it points to something that proponents of the capital gains tax have been saying – that people have been rolling up the gain, have been farming for capital gain, not for income.
And so, should we really be allowing that to happen on principles of equity? Something on that principle of equity should be said that farmers are able to claim an interest deduction for the full amount of borrowings they have on the basis that they are deriving gross income. But, if a substantial amount of that income in economic terms is a capital gain, why should they be getting a deduction for that? This is something the tax system has allowed for the last 30 years, and it’s an anomaly which can only be addressed either by introducing rules which restrict interest deductions or a comprehensive capital gains tax.
Now, this is an interesting point to think about next time you hear farmers saying they’re the backbone of the economy. Contemplate that they only contribute one percent of the total tax take.
Finally, this week, we talked about the digital services tax on the tech giants. They’re still under scrutiny. Facebook has finally responded by saying it will try and ban white supremacist speech. The response from tech companies were, “Go on.”
But, on the tax side, the latest person to weigh on this is Christine Lagarde, Head of the International Monetary Fund. She has come out and said the tech giants should pay all tax.
As I said last week, this is a trend that’s running around the world. Countries are looking at the tech giants, realising that the current tax system doesn’t tax their profits extremely well, and are looking to introduce new means of doing so such as the digital services tax.
Now, the Organisation for Economic Co-operation and Development is working on a more comprehensive approach to taxing more tech giants. We may see something towards the end of next year. But, in the meantime, as I noted last week, an increasing number of countries are saying, “Enough of this. We can’t allow this to continue. We’re pushing for a digital services tax.”
The IMF carries a fair amount of weight. So, when it starts weighing in on this argument, you can expect that the pressure on the tech giants will continue to build.
Please send me your feedback, tell your friends and clients, and have a good week!
Until then, as-salamu alaykum.
Peace be upon you, and peace be upon all of us.
18 Feb, 2019 | Tax News
The year ahead in tax will be dominated by this week’s release of the Tax Working Group’s final report. The TWG is expected to recommend the introduction of a realisation based capital gains tax to close a perceived major gap in New Zealand’s tax system.
The coming debate over CGT will almost certainly drown out the majority of the rest of the TWG’s recommendations, and will dominate public discussions about tax this year.
But even without the TWG’s final report, 2019 is going to be a hugely significant year for Inland Revenue and its “customers”. In April the third stage (Release 3) of Inland Revenue’s Business Transformation goes live, the biggest test yet of Inland Revenue’s $1.5 billion programme. (The overall Business Transformation budget for the year ended 30th June is $206.8 million for operating expenditure and a further $91 million in capital expenditure.)
Release 3 implements changes affecting nearly two million taxpayers on PAYE. From 1st April Inland Revenue will automatically calculate the tax position for the year ended 31st March 2019 for all employees on PAYE. Taxpayers will no longer need to apply for a refund either themselves or through one of the tax refund companies. It’s anticipated an estimated 1.67 million taxpayers will receive a refund – about 720,000 for the first time ever. A further 263,000 taxpayers are expected to receive tax demands, about 115,000 for the first time.
Unsurprisingly, the spectre of Novopay hangs over Inland Revenue’s Business Transformation programme, so right now Inland Revenue is racing to make sure everything will be ready in April. However, there are signs it is not wholly on track.
As part of Business Transformation, Inland Revenue prepares monthly reports updating the Minister of Revenue on progress. The latest available report for November 2018 was prepared on 10th December 2018.
It doesn’t take much reading between the lines for it to become apparent there are concerns about whether Inland Revenue will be ready. The update reports
“Whilst our overall status remains at amber over the last reporting period the schedule “key” has deteriorated to amber as a result of the challenges we are experiencing with testing. The resources “key” has deteriorated to amber due to some constraints managing resources between Releases 3 and 4 and the delivery partners “key” has deteriorated to light amber”
An amber status means there are “some” risks to achieving the targeted go live date of 23rd April although Inland Revenue believes it is still on track. Those risks include testing, managing the transfer of data from the tax refund companies, payday filing and tax agents.
The report reveals that Inland Revenue “requested” the 31 tax refund companies (Personal Tax Summary Intermediaries in officialese) to hand over details of some 783,000 clients as part of the preparation for Release 3. 26 of the tax refund companies agreed to do so knowing that Inland Revenue could use its powers under the Tax Administration Act 1994 to compel them to comply. The remaining five companies will have no option but to follow suit. Many of the tax refund companies are expected to close down once Release 3 takes effect.
As another report on the Business Transformation prepared by the Minister of Revenue for the Cabinet Government Administration and Expenditure Review Committee observes, the tax refund companies are amongst a number of groups who are “potentially less positive” about the changes.
Other than the tax refund companies, these groups include the more than 5,600 tax agents responsible for 2.7 million taxpayers, financial institutions and over 200,000 employers. All face significant costs and disruption getting ready for Release 3, particularly in relation to increased reporting requirements.
As I outlined previously Inland Revenue’s relationship with tax agents has been problematic for some time and shows little sign of improving.
Inland Revenue should also be concerned about the slow progress on another key change starting in April payday filing. Under payday filing all employers are required to file salary and wages information with Inland Revenue on the date of payment rather than monthly as at present. Long term, payday filing will benefit employees by providing real-time information to ensure they are not under/overpaid during a tax year. In the short term, however, it represents a significant compliance cost for employers, particularly smaller employers.
At present Inland Revenue’s own online payday filing system could be generously described as “not very user friendly” and other software providers seem to be behind schedule in delivering alternatives. Worryingly, as of 30 November 2018 only 6,500 employers of approximately 207,000 had “indicated” an intention to begin payday filing. These are probably the largest employers covering the majority of New Zealand’s 2.5 million salary and wage earners. It still means a significant number of employers may not be ready by 1 April.
One option to help smaller employers and mitigate their costs could be to extend the existing payroll subsidy. However, this was rejected by Inland Revenue in its report to the Finance and Expenditure Committee on the Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill partly because the estimated cost of $8.9 million was unbudgeted.
Imposing additional obligations on employers and simultaneously rejecting a subsidy to help them do so are not reconcilable decisions. In my view it represents a clear breach of Inland Revenue’s duty under section 6A of the Tax Administration Act to take into consideration “the compliance costs incurred by taxpayers”. This important point is barely acknowledged, let alone discussed in either report. Maybe it would be useful if MPs on the Finance and Expenditure Committee spent less time grandstanding and more time monitoring Inland Revenue’s performance and obligations.
Release 3 isn’t the only significant change happening in April. From 1st April residential property investors will lose the ability to offset losses against other income when loss ring-fencing is introduced. According to Inland Revenue about 40% of all residential property investors report rental losses with an average tax benefit of $2,000 per annum. The measure is expected to raise about $190 million in additional tax.
Looking beyond April, the Budget in May will be the first under Treasury’s new Living Standards Framework. It will be interesting to see whether tax changes are included to help meet the proposed focus on wellbeing and the environment. Separately, we may also see some measures implementing some of the less controversial recommendations of the TWG.
So, it will be a very busy year ahead in tax. Although for now, all eyes will be on the TWG’s final report, come April Release 3 will affect many more taxpayers than any hypothetical capital gains tax. Although Inland Revenue expects some teething problems as the changes bed in (it proposes to have additional support or “early life support” for staff and “customers” for some 13 weeks after Release 3), it also expects the initial pain will be replaced by long term benefits. Just don’t talk to tax agents and employers about it.
This article first published on Interest.co.nz
