21 Mar, 2022 | The Week in Tax
- The Finance and Expenditure Committee reports back on the tax bill relating to the interest deduction limitation rules
- Inland Revenue releases a swathe of consultation documents relating to GST apportionment, the gig economy & tax avoidance
- New trust reporting standards released
Transcript
If a week is a long time in politics, then the three weeks since our last podcast feels like a decade. If you think I’m exaggerating, Inland Revenue’s latest Agents Answers notes that more than 100 policy and remedial changes are expected to take effect on or before 1st April.
Aside from this, there are also the ongoing COVID support measures. Applications for the second COVID support payment opened on Monday 14th and next Monday 21st of March applications open for a top up loan from the Small Business Cashflow Scheme. In addition, in the wake of the disruption caused by the ongoing Omicron wave, Inland Revenue has effectively delayed the due date for filing March 2021 income year tax returns until 31st May.
This extension also applies to certain elections, which would normally be due by 31st March, and such elections include filing controlled foreign companies and Foreign Investment Fund disclosure forms, making subvention payments relating to the 2021 tax year, and look through company elections for new companies or companies that were previously non-active. That’s all-good stuff and helpful to those tax agents who have been hit by Omicron and their schedules disrupted.
Limiting interest deductions for residential property investors
As I said, it’s been a busy period since our last podcast. The Taxation (Annual Rates for 2021-2022, GST and Remedial Matters) Bill, introduced on 8th September 2021, was reported back to Parliament on 3rd March.
Now this is the bill, which by way of a supplementary order paper, contains the controversial interest limitation and deductibility rules for residential investment property. The bill also has a number of other important measures relating to the treatment of cryptoassets, and GST in particular. It’s an important bill which must be passed by 31st March I believe, as part of the normal Parliamentary supply process.
Cryptoassets are an extremely fast-moving area. As the report of the Finance Expenditure Committee notes, there are already over 15,000 different types of crypto assets. And as a result, the Committee has recommended changes to definitions, in particular, removing the fungibility requirement for the cryptoasset definition. Its now going to add a definition for nonfungible tokens, or NFTs, which are all the rage at the moment.
There was also a recommended change to the GST apportionment rules to make it clearer the new apportionment rules do not target people who are property developers. I’ll talk a bit more about GST apportionment a bit later in the podcast.
But of course, the big and most controversial part of the bill, is in relation to the interest limitation rules. Broadly speaking, there are some changes around the fringes, but nothing significant. And that’s what I would expect with the Government’s super majority. It will push through these changes.
One of the things of note and which will be disappointing to some, is that submissions that the definition of new build should include improving, renovating or repairing existing buildings, dwellings and extensive remediation of uninhabitable dwellings, were not adopted.
The Committee did not consider these to be new builds and should not receive tax incentives by exempting the activities from interest limitation rules. However, the Committee considered the new build exemption should apply in some circumstances where “remediation of an existing dwelling prevents it from falling out of available housing supply.”
The Committee went on “In expanding the exemption, we aim to make these rules as clear and objective as possible, so would avoid using subjective terms such as ‘uninhabitable’.” A wise move there.
They therefore suggest the new build exemption would apply to existing dwellings in two specific situations. These are where a dwelling has been on the earthquake prone buildings register but remediated and removed from the register on or after 27th March 2020, or a leaky home has been substantially, at least 75%, reclad. They say there are verifiable criteria available which would allow for clear application of a new build exemption.
They also have agreed that there needs to be some changes to rollover relief provisions in relation to transfers to and from trusts and parents co-owning property with their children. The later has become particularly controversial with reports in the media about how the bright-line test has affected parents helping their children into a house.
An example given, where parents become co-owners of a property with their adult children and later sell a part share of the property to the children. The parents would be disadvantaged if the period subject to the bright-line test for any remaining share they own restarts on the date of the sale. There’s going to be an amendment to change that.
One of the other things, of course, that happened whilst I was away cycling part of the Tour Aotearoa – highly recommended by the way – is that National made its proposals around changes to the tax thresholds. There’s commentary from the National Party in the Minority Report on the lack of action in that area. And as you might expect, ACT also takes a view that these changes aren’t needed at all. So, politics will carry on as normal
Simplifying GST
Moving on, Inland Revenue has been busy kicking out a number of consultation documents. An important one was on 8th March, which relates to GST apportionment and adjustment rules, which I mentioned earlier. Inland Revenue is looking at policy options for reforming and simplifying these rules.
This is actually very important because these rules are very complex. One concern in particular, is that although GST does not tax most private assets, such as dwellings, an issue arises where some private assets may be used by a GST registered person to make taxable supplies. For example, when a person is working from a home office. Or a GST registered person may own a holiday home, which they also rent out as a taxable supply of guest accommodation.
There is an argument the use and disposal of those private assets may be in the course of furtherance of a registered person’s taxable activity. So that could lead to a GST liability when those assets are sold or an apportionment adjustment if there is a decreased percentage of taxable use.
Now what Inland Revenue have pointed out is, and what’s well known, is that many registered persons are unaware there could be such GST consequences. And what it’s suggesting is that we need to look at proposing a revision of the rules and simplification.
The proposals include a principal payment purpose test for assets purchased for less than $5000 GST exclusive. For assets above that threshold a de minimis test is proposed. If the registered person’s taxable use of the asset is less than 20%, the asset is regarded as non-taxable. No input tax deduction could be claimed on purchase, but critically no GST would be accounted for on a sale. The flipside of this is an 80% rounding up rule. Assets with 80% or more taxable use would be deemed to have 100% full taxable use. So therefore, there would be a full input tax deduction with only small amounts of non-taxable use. This is an important paper and worth reading in detail.
Taxing the gig economy
Another paper which came out two days later, was on the role of digital platforms in the taxation of the gig and sharing economy.
This paper contains proposals intended to make it easier for people earning income through digital platforms, the gig and sharing economy to comply with the tax obligations. It’s looking for feedback on how GST should apply in those rules, and whether there are opportunities to reduce compliance costs in the tax system for people earning in the income from the gig economy. As the paper notes the gig economy is now a substantial and increasing part of the modern economy.
The paper looks at what’s going on and how the current tax system deals with the gig economy. In my view the tax system currently doesn’t deal very well with the micro and small businesses. Just as an aside, in relation to this, I do wonder whether it’s time for the tax system to introduce a nil rate band for income tax purposes. This is something we see in other jurisdictions, for example across the Ditch, in Australia.
As the current legislation stands, every dollar that is earned must be taxed. And I do wonder, that might have been appropriate when inflation was low, but now seems to represent an unnecessary burden, particularly when the rate of tax in the first $14,000 is only 10.5%. The question is how much tax would it cost? How much is involved in calculating that and collecting it? Again, I recommend a good thorough read of this paper.
Minimum standards for trusts
On 7th March, an Order was made setting out the minimum standards for financial statements to be prepared by trusts in relation to new disclosure requirements.
These are actually in force for the current tax year and will be required to be complied with when we start preparing tax returns for the year ended 31st March 2022.
And there’s a special report that sets out what trusts are required to comply and what’s expected to be prepared. Basically, the minimum requirement will be to prepare a statement of profit loss and a statement of financial position. This is part of the wider information gathering that Inland Revenue wants, but also in this particular case on trusts, when you look at the new Trusts Act, which took effect earlier this last year, there’s an expectation for trustees to provide and prepare more financial information.
So again, that’s an effective increase in compliance costs, yes, but also something which is part of a wider need for transparency and full disclosure in the trust regime.
Preventing avoidance of the new top tax rate
Now, if all that wasn’t enough to be chewing over, on Wednesday Inland Revenue released a consultation document on top tax rate avoidance prevention proposals. It’s proposing some measures that limit the ability of individuals to avoid the 39 or 33% personal income tax through use of a company structure.
Now these are what we call integrity measures, there to support the integrity of the tax system. They are to be expected. But what’s interesting here and what’s going to cause some controversy, is a proposal that the sale of shares in a company by a controlling shareholder will be treated as giving rise to a dividend for that shareholder to the extent that the company and its subsidiaries have retained earnings.
This is to counteract the 11-percentage point differential between tax paid at a company level at 28%, and tax paid at the individual level at 39%. What concerns the policy advisers is that companies will not be making distributions of dividends, but by selling the shares and the shareholder usually realising what is a tax-free capital gain under present legislation, this issue of that 11-percentage point differential can be avoided.
Accordingly, one of the measures in this consultation document is to address that. There are a few other matters in the paper which I’m still digesting. So what I propose to do is talk about it at more length next week.
Well, that’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax tax or wherever you get your podcasts. Thank you for listening, and please send me your feedback and tell your friends and clients. Until next time, kia pai te wiki. Have a great week.
15 Feb, 2021 | The Week in Tax
- This week more on the state of Inland Revenue’s Business Transformation programme
- Grant Robertson’s warning to property speculators
- Inland Revenue’s latest view on tax avoidance.
Transcript
Inland Revenue for the past five years has been involved in a huge upgrade of its capabilities, what it calls its Business Transformation project. This has been described by Treasury as “complex, high risk and fiscally significant”. The budget for the project is $1.8 billion and it’s now into its final stages with the expectation that it will all be complete by early 2022.
Given the sheer scale of the project, Inland Revenue has been monitored very closely on its progress by Treasury and it also has to provide regular reports to Cabinet.
The transformation status update for October and November 2020 has been published, and it makes for interesting reading.
The status of the programme is said to be light amber overall, which means that there are minor issues in some areas that can be resolved at the programme level.
What would be encouraging to Cabinet is that the project as of 30 June 2020, is $120 million dollars under budget. The cumulative spend to 30 June 2020 is $1,122 million and Stage Four, which is expected to be completed next year, is expected to cost a further $296.5 million.
IT projects will always attract a fair amount of criticism because they can and do overrun on costs substantially. It’s perhaps an unfair comparison, but it was interesting to see this morning that the costs to date of the Covid-19 tracer app have been estimated to be $6.4 million so far. Now in fairness, the Covid-19 tracer app involves a significantly smaller scale of complexity than designing a system that’s going to manage the tax affairs of six, seven or eight million taxpayers and has $80 billion plus running through it each year.
But at this stage, it would be fair to say that Inland Revenue seems pleased with the project’s progress so far given its budget and expectations. Although the latest update does state, “The temptation to overstretch Inland Revenue capability should be resisted until Business Transformation is closed.” In other words, we can do a lot more now, but don’t be expecting us to do heaps more straight away.
But the more interesting document released at the same time was the Programme Business Case Addendum on Business Transformation.
What makes this particularly interesting is it gives more detail about what’s been happening and sets out more reasons why the project is needed and the economic benefits for the Government.
These programme business cases are prepared annually, the previous one was prepared in October 2019 and this one in October 2020. The most significant update is to the economic case. The commercial and management cases have also been updated, but no changes have been made to either strategic or financial cases for the project.
Digging into the document, you get an idea of Inland Revenue’s improved capabilities. It talks, for example, at some length about how it responded to the implementation of the Small Business Cash-Flow scheme. The scheme went live at one minute after midnight on 12th May 2020. Now it was 39 working days after the initial decision to begin some work, and then was just 10 working days from when the Government confirmed its intention on April 25th to when the scheme was launched.
In its first five to 10 minutes, it received 43 applications and by 1.20 AM, i.e. just a little bit more than an hour or so after it was launched, it had already received 600 applications. As of 9th October 2020, Inland Revenue had received 104,000 applications and approved $1.6 billion in loans. As I’ve said before and am happy to say again, the Small Business Cash Flow Scheme is a very successful scheme and Inland Revenue do deserve a lot of credit for getting this up and running so quickly.
There’s a few wee snippets of things in the system that will need to be improved. The tax system overall. For example, you may remember that back in 2019 it emerged that a considerable number of people – 1.5 million in total – had the incorrect prescribed investor rate. Now, Inland Revenue got onto this and sent out 1.5 million letters saying, “Hey, you’ve got the wrong rate, either too low or too high so you need to contact your KiwiSaver provider to change it”, but only 15 per cent did so.
Fortunately, the law has been changed so that overpaid tax can now be credited, whereas previously if you’d overpaid under the prescribed investor rate regime, you lost it. So, that’s a good result.
But more importantly, and picking up a point I made last week, that the Inland Revenue tax policy work programme includes a look what is going on with charities – the donations tax credits process has been revamped. For the year to 31 March 2020, Inland Revenue identified 31,000 claims worth $23 million that were either an error or fraud in its view. And of that, 3,000 claims totalling $4.1 million were referred to audit teams to investigate.
So Inland Revenue’s ability to pick up and identify errors earlier and respond more quickly has been enhanced as a result of Business Transformation. Again, what you would hope to see and so far, so good.
The document sets out what Inland Revenue sees as the main benefit areas for the Government and who it calls “customers.” (In this document, customers are referred to 32 times and taxpayers just once). The main benefits are that it’s going to be easier for taxpayers, and the revenue system is much more resilient. You do wonder what could have happened to the old system given its state if a determined hacker had had a go. The Government now has greater ability to implement policy and that’s very significant.
And then it gets into more nonmonetary and monetary benefits which is where it gets particularly interesting. It says the compliance effort has been reduced for small to medium sized businesses. Now, the methodology here is a little outdated. Inland Revenue hasn’t run an up to date survey, but it does estimate that the median time SMEs spent on meeting their tax obligations was 36 hours back in 2013. It’s expecting that Business Transformation will reduce that by 10 to 26 hours a year. And the cumulative value of the time saved will be over $1.3 billion dollars. It will run a new survey on this later this year.
The big expectation is that the amount of assessed crown revenue will increase $2.8 billion 30 June 2024. And that’s a result of the efficiencies brought into the system, allowing earlier identification of non-compliance as well as easier compliance.
So far, Inland Revenue estimates that to 30 June 2020 it has achieved $280 million of that $2.8 billion. This means over the next four financial years to 30 June 2024 it expects to achieve nearly $2.6 billion dollars of additional revenue. In the year that ends on 30 June this year there will be another $290 million found. Then it substantially jumps up over the next three years with $600 million in the year to June 2022, $750 million in the year to June 2023 and almost one billion dollars in the year to June 2024. That’s a fairly significant amount of money coming in over the next three or four years, which Grant Robertson will be very grateful about. So Inland Revenue has made a rod for its own back, if you like, in terms of these ambitious additional tax revenue it expects.
Now, the other big benefit, and this is a source of some controversy when I spoke about before Christmas, is the cumulative administrative savings Inland Revenue expects to deliver. By June 2024 these are supposed to amount to $495 million.
Now, as of the date of this report, it’s ahead of target, having achieved savings of $118 million compared to the target of $95 million. But it fell short by some $23 million of its target of $80 million for the year to June 2020. Inland Revenue is therefore hoping to save a further $370 million in the next four financial years, so the pressure will be on in that regard. So again, you can expect the Government and ourselves to be paying particular attention to how that is progressing.
But there’s one controversy about Business Transformation that I think’s important. The whole project cost has been enormous. And one of the concerns I would have about this is that New Zealand businesses – that is New Zealand owned businesses – have by and large not had a great deal of input into this. According to this report, about where it is spent between July 2014 and 2020 and where Inland Revenue spent more than $500,000 on contractors and consultants providing services across Business Transformation the total percentage spend on New Zealand companies was 36%.
(The contract, by the way, was awarded to a company called FAST based in the United States and Accenture Consulting, another multinational also provided assistance).
Now, if you include companies/contractors resident for tax purposes in New Zealand, then the total New Zealand percentage spend rises to 73%. In other words, although the Government has passed money through Inland Revenue to a business which is overseas owned, that income, by and large, will be taxed in New Zealand. To give you some idea of just how much might be involved according to Inland Revenue’s June 2020 annual report the total spend for contractors and consultants was just under $183 million.
That’s down, by the way, from $206 million dollars in the June 2019 year.
Now just picking up a point from my time on the Small Business Council, this is an area where we saw a lot of frustration from small businesses. They felt they could not get through to deliver services to the Government because of what they saw as excessive gatekeeping and bureaucracy involved in the industry.
New Zealand has a great IT industry just picking up and getting that point about the Covid-19 app that cost $6.4 million which is absolute peanuts. Apparently in Britain, they’ve spent £10 million on one app which was abandoned and do not appear to have anything that works as efficiently as our app. So, the capability is here.
And I feel that there was a great missed opportunity with Business Transformation. Hopefully going forward the percentage of New Zealand businesses that do get involved with the tail end of this work or new work as it arises, will be increased.
But the overall state you can take from this report is Inland Revenue considers Business Transformation is moving in the right direction. We’ll need to pay attention to whether it will achieve its ambitious goals. But certainly, it feels it has the tools available to achieve what the Government will want, that is additional tax revenue to pay down the massive debt that’s been run up because of Covid-19 and no doubt the huge spend going forward for maintaining our infrastructure and health services, as well as regular costs such as superannuation and education.
Robertson on property speculation
Moving on, the Finance Minister Grant Robertson made a speech to the BNZ on Tuesday, about the forthcoming Budget Policy Statement. In the course of his speech he said,
But we can do more or more to manage demand, particularly from those who are speculating New Zealanders are seeing family members being crowded out of the opportunity to purchase a home of their own by speculators and investors.
The housing boom and the resulting pressure on the rental market and vastly increased prices is a concern to the Government as it is getting shot at from all sides. So clearly, this statement from Grant Robertson was a reminder that Inland Revenue does have the tools, which I’ve just explained, it feels it can do a lot more to look into the speculators.
And that leads on to the inevitable discussion of the bright-line test, which to quickly recap applies when any residential property is sold within five years of acquisition. The sale will be taxed unless an exemption applies.
Now, the bright-line test is one of a number of other property taxation clauses within the Income Tax Act. There is Section CB 6 which taxes property bought with an intention or purpose of sale. The problem with the tax laws around the taxation of property is the absence of a comprehensive capital gains tax. There’s a lot of subjective clauses involved. The bright line test is very largely unique in that it very specifically says if this happens, then it’s taxable subject to exemptions.
On the other hand, section CB 6, which I just mentioned, talks about purpose or intent. There’s also section CB 12 which taxes a subdivision which involves work not of a minor nature.
And so, of course, you’ve got these subjective phrases. And just to compound those issues is that when you drill into these sections, sometimes they will apply if that particular activity happens within 10 years of acquisition, but maybe within 10 years of a building being completed, the timeline isn’t always the same.
And the exemptions that may be available because it’s a residence or business premises for example, vary as to who can use them. For example, there are four possible exemptions available to someone who’s taxable under section CB 12, which is a subdivision which is not of a minor nature. But two of those exemptions don’t apply if the person involved is a trust.
And so these inconsistencies and details around the varying times of which rules may apply and when give plenty work for people like myself. But notwithstanding that, they also point to the need for a complete rethink of those rules to bring clarification and some form of internal consistency. Why should one exemption apply to a property owned by a trust, but another exemption not? You would expect it to be consistent across the board. Now that it so happens that Inland Revenue does have such a project on its on its policy work programme. So, we can expect to see something maybe later this year or early next year.
Updating Inland Revenue’s view on what is tax avoidance
And finally, with the increase in the tax rate to 39% coming up, it’s timely to consider the implications of trying to take steps to mitigate that. The Income Tax Act has a number of tax avoidance provisions which Inland Revenue can apply. Sections BG 1 is the general anti avoidance provision and for those with very long memories who may recall the Penny Hooper case, involving a couple of surgeons, this was the provision applied.
Inland Revenue has got an Interpretation Statement on anti-avoidance but it was issued in 2005. It has now released an updated version for consultation.
And that update came with a five page information sheet, which when something like this comes with an information sheet, you know you’re in for some particularly dense reading.
There’s too much to cover right now so I’ll pick it up at a later podcast when we have had a chance to consider it closely. But this is a reminder that the temptation will be to start making plans to mitigate the impact of the 39% rate. But you need to be aware of Inland Revenue’s possible response. I’d therefore recommend every tax advisor has a close look at what this new draft interpretation statement is saying.
Well, on that happy note, that’s it for this week. Thank you for listening. I’m Terry Baucher 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, ka kite āno.
7 Sep, 2020 | The Week in Tax
This week, I’m joined by Lynda Moore, The Money Mentalist. Lynda’s background is in accounting, so she understands numbers. She also studied under Professor David Krueger in the USA to focus on money psychology. She now combines two skill sets as money mentor/coach, working with business owners, couples and individuals to get an understanding of how they think, feel and behave with their money, how they can make better choices to reach their financial goals. Mōrena, Lynda, welcome to the podcast.
Transcript
Lynda Moore
Good morning. It’s lovely to be here.
TB
So, Lynda, how do people’s attitude towards money change when it comes to tax?
Lynda Moore
There’s a bit of a spectrum to it. At one end of the spectrum, you have people who are kind of terrified of the tax department and will do anything to make sure that they make those commitments to the IRD. Whether or not they can afford to do that in terms of cash flow and other things going on.
And at the other end of the spectrum, there are those who kind of go, “It’s just the tax department. I’ve got other things to do” whether it’s right or wrong and what I think they should be doing with their money. And then somewhere in the middle there, you’ve got, I guess, what you call good compliant tax people who know what’s coming up, and plan for it, and they manage their tax really well. I tend to work with people who are kind of at either end of that spectrum.
TB
So is there any particular type of business or person who consistently gets into trouble with tax in your experience?
Lynda Moore
It’s not a particular industry or anything like that. It’s more about the business owner and it’s more about the money, personality, the mindset and their style. For example, if you have a business owner who has the money personality of being a spender, then it will be much, much harder for them to save for tax, in fact it might not be on their radar.
Whereas if you have the polar opposite, which we call the ‘Hoarder Personality’, they are really good money managers. They are likely to be the ones who will have their tax saved. So, when their accountant sends out a tax letter, there is no stress, the money’s there, they’re sorted.
So, the problem clients seem to be more sort at ‘The Spender’ end of the spectrum. If you use me as an example, which I’m quite happy to do, my money personality is an ‘Amasser/Spender’.
Business owners need to have some ‘Amasser/Spender’ in them because you need that to grow a business. So, if I’m talking to someone who is a business owner and I see an Amasser personality, I’m kind of like ‘Why are you in business?’
With a Spender, we find it a little harder to put that money away for tax because they will spend in other areas in our business to grow it. Whereas an ‘Amasser/Hoarder’ will make sure they’ve got their tax money tucked away and then they’ll start to grow the business.
So, we kind of look at it from slightly different aspects. And please bear in mind these are kind of generalisations. They are a little different.
TB
So what stage do you get involved? Are you lucky enough to get in at the beginning or is it “Help Lynda, we’re in trouble!”
Lynda Moore
It can actually be a bit of both, because generally clients will come to me when they’re looking and they’re saying “So, my accountant has just told me I’ve made all of this profit. I don’t know where it is. So, my neighbour down the road, he’s just bought a boat and I can’t afford one. But my business is making lots of money. What’s going on?”
So I see that disconnect between where they’re told they made a profit and got a big tax bill, but they haven’t got the cash either in the business or in life. And then it’s finding the overall picture of what’s going on in your business and what’s going in your life that’s lead you to that.
Or I also come across the client who’s going “I’ve just started a business. I want to make sure”. And sometimes it will be “I’m going to leave my job and start a business, but my partner is really worried how are we going to live.” In which case we start with that process first and we make sure that a new business owner understands the ‘tax holiday’, and you need to save because in year two you’ve got a double whammy. So again, I get both ends. I get experienced business owners and I get newbies asking questions.
TB
You touched on the ‘tax holiday’ there, the first-year issue. This is something I see quite a bit of, and I think every accountant experiences quite a bit. That first year of business when provisional tax isn’t payable and you just have to wait till terminal tax, which is a year down the track. And lo and behold, what comes around you’re into provisional tax for that year as well. So essentially, you’re paying two years at once.
That’s a very hard thing to manage with new businesses. And I imagine for the spender type client, that’s a horrendous problem. And that’s when they immediately run into quicksands. How do you address that?
Lynda Moore
Well, I think it’s an understanding from the business owner. I think quite often they don’t go to an accountant or get advice when they start the business. It’s like, “Oh, we’re going into business”. And because as an employee, you don’t physically pay the tax they don’t have that mindset and that attachment of “I have to physically pay tax”. You kind of do with GST, but not so much income tax.
So unless they get advice early and are told how to structure the business and put away money for tax, it’s not going to happen until year two. And that’s when they’re going to get a horrendous shock when their income suddenly drops significantly because they can’t find that tax.
TB
Saving for taxes isn’t easy. So, what’s your tips to for in that regard? What do you tell your clients that this is what’s going to happen and how to organise themselves?
Lynda Moore
It comes down to “You’ve got to know your numbers”. So whether you can do that yourself through your accounting system and once you pull out your profit and loss. Alternatively, you ask your accountant “I just need to have a very simple profit and loss once a month”.
For the clients I work with, I start out with the basic company tax rate of 28%. So whatever system you’re using even if it’s not 100% accurate just put 28% of the profit away into a separate bank account.
If you are a spender use a different bank so you can’t transfer from one to the other. And give that account a nickname. Call it the ‘My tax savings account’. Because then your brain looks at that and goes, “Oh, that’s for tax. That’s not my holiday in Fiji account. It’s the IRD account”. And by naming this account for tax, you associate it with that.
So it doesn’t matter what you want to save. If you want to save for a holiday in Fiji, have a Fiji savings account. But if you give it a nickname that associates with what you’re saving towards, you are more likely to do it and you are less likely to dip into it.
TB
Wow, that’s quite interesting. I’ll just pick up a point you mentioned there. People probably get the hang of GST quite quickly. What’s your recommendation around paying GST? My preference is to go two-monthly because you get used to saving for and getting ready for it. Six-monthly returns you get a shock, as you’ve suddenly got to find $30-40,000 which is often gone because. GST is more often than not used as working capital in a small business.
Lynda Moore
If I see very few people putting away GST money versus putting away [income] tax money. And again, if you have that right attitude you are that hoarder sort of personality you can save up to six months GST. But more often than not, it doesn’t work.
For me, what I do, because I run my business through Xero, when I’m doing my admin, I just look to see how’s my GST accumulating and whether I need to pull a little bit of money out of my working account into my GST savings account. And then when I come to month-end and my monthly report, the first thing I do is pay myself first. I put away 10% of my profit into a separate account which is my “Building up profit for business development.” Then my tax money goes into the tax savings account. And it’s just part of what I do when I do month-end reporting.
Now, if you’re a business owner, you need to ask your accountant to send you a profit and loss report or three little lines to say this is what it looks like. Bear in mind, I’m an accountant and I love my industry, but I don’t understand why some accountants don’t simply send a little email. If you’re doing the client’s GST, why can’t they just add three lines that says, ‘Hey, you made this much profit, put away this much tax.’ You know, they’re sending a GST report so why just add that in? Because it’s an important piece of information.
TB
That’s a really, really good point. It touches on an issue I think the industry is struggling a little bit with, that there’s resistance around costs. So accounting is basically seen as a cost so everyone’s driving it down and there’s offshoring going on as well.
So the mentality I think that is needed for business advisers, accountants and tax consultants is to flip that round and be proactive and say “Here, this is what we are seeing”. I mean, the GST returns are a really good example, as you just pointed out. Every two months, an accountant who’s working alongside a client can say, “Hey, this is what we’re seeing. Where are you at? And you need to be doing X, Y and Z.”
But there seems to be resistance both in the industry to take those steps forward and from clients to want that sort of advice. Until then, suddenly everything blows up and fingers are being pointed everywhere. How do you address that?
Lynda Moore
I think for some reason, there seems to be a bit of fear about going to talk to the accountant. One, because you think you’re going to get billed for it. And secondly, the feedback that I sometimes get, particularly when I was an accountant in practice as well, from women in business, is they don’t understand what they’re being told, and you know they feel like they are being talked down to a little bit.
It’s not every accountant. There are some amazing accountants out there, and I know a number of them. And I think it’s a matter sometimes, that once you have that business relationship, you had those for life. Whereas sometimes your business changes, the practice changes, you know. And maybe sometimes you don’t suit that type of accountant for whatever reason. And it’s time to go and find someone who else does suit where you are. It’s not like we now have a fear of changing banks. And finally, the client feels “I don’t know what to ask”.
That’s a really good point about communication because it leads on to something that’s we’re seeing more of now and I’m sure you might have seen it as well. Inland Revenue’s Business Transformation has been built around directly interacting with taxpayers or ‘customers’ in its jargon.
As a tax agent that has been frustrating from my end because there’s a lot of communication being fired out to my clients and then I’m having to sweep it up and say “No, no, no. That’s not what they meant. No, that’s wrong” and all the rest of it.
Are you seeing that as well? And how do you deal with that from your end? Is it a case of over-communication? Now we’re going from one side – where you talked about accountants don’t communicate as well as they should – to Inland Revenue’s telling you everything every day. It’s a bit much, isn’t it? How do you address that?
Lynda Moore
It’s really interesting because as you said it’s gone from one extreme to the other. I did have one client who’s in this “I’m terrified of the IRD” category who thought they had to pay this huge sum of money. But it was actually one of those little letters that said “It’s due over the next six months” and they paid it all at once. And I’m like “You can’t get that back.”
So I think sometimes what happens is “Oh it’s from the IRD, I’ve got to do something about it”, or “I’m just going to ignore it”. And again, I see that sort of polar response. It’s almost like when you get on someone’s mailing list and they email you newsletters too frequently, and you just shut down.
So I think there’s certainly some clients who’ve done that, which is also dangerous because they could miss something that’s important that they need to deal with. But they’ve gone into that mode “It’s just the IRD sending me more stuff that I don’t need to worry about or deal with”.
TB
Talking about anxiety, right now, how are people feeling out there?
Lynda Moore
All over the place I guess is the best way to describe it because, and I don’t know about you, but when I set my goals for 2020, there was not a pandemic in my planning whatsoever. You know, everyone was kind of going, “Oh, 2019 wasn’t that great but 2020 is going to be absolutely amazing.” So, we were in that kind of head space looking at it really positively. It was going to be a great year.
Then we had this pandemic and we hit lockdown. So, with financial anxiety you go into the state of Flight, Fight or Freeze.
Now, what a Freeze person does is they basically go “Life’s just too hard. And I’m just going to be an ostrich.” And they will just put their head in the sand and it’s all just too hard. They don’t know what to do, how to respond, how to react. When you go into that flight mode, you just want to hide from things. You’re not quite sure where to take advice. You might find yourself going all over the place and going on this roller coaster of emotions where you think things are okay, “I’ll start doing this” and then “Oh hang on, I’ll go down this path”. So you’re a bit like scrambled eggs and you just don’t quite know what to do.
And then you get the ones who go into Fight mode. Now, these are the ones who will ring the bank, the accountant, and they’ll be angry. That’s the usual kind of fight response, you get into the space of feeling angry and frustrated. When you’re in that mode you can make some really bad decisions because your view is really narrow, and you can’t see a lot of options and you will take an option that’s in front of you. And it may not be your best option. So, there’s potentially a few really bad decisions being made at the moment.
And also because there’s so much coming through from the media. We’ve got the Reserve Bank going “We want you to do this to keep the economy going”. We’ve got banks going “We’ve got lots of cheap money, but we’ve got responsible lending to think about”. And then you come down to your own business and your own household, and you’ve got to look at what is best for you. So it’s very confusing, all these layers of information.
So you are going to go through all these emotions and what you want to do is get into the action space. This is where you take a deep breath, sit down, do some planning and bring it back to you, your business, your household and what you need to do for you.
And it does sound a little bit harsh, but it is about looking after everyone else’s business as well. Put yourself first, because if your business falls over, you can’t help another business. You can’t help your family. You can’t pay your mortgage. So you do need to put yourself first. Make sure you’re secure, and you’ve got all the support you need.
And I guess that’s the other flip-side. Right now, there’s a lot of support out there. You’ve just got to go and look for it.
So that’s my best advice right now to business owners. Put yourself first. Your numbers are your best friend, your accountant, your bank manager, your support network of experts – not your mate down at the pub. Your experts are your best friends right now. Use them. Use them.
TB
Inland Revenue has a role right now because they’re administering the Small Business Cashflow Loan Scheme, which I am a big fan of, as I think for a lot of small businesses, it’s a very vital tool. But it’s not a grant, you know, they’ve got to commit to repay it. And then we’ve got these wage subsidies as well going around.
We talked a few minutes ago about some of the confusing messages we get from Inland Revenue. But how have you found it and the Ministry of Social Development in that space with the loan schemes and wage subsidies? It’s probably been very helpful for one or two of your clients I would think.
Lynda Moore
Oh, definitely. It has been very, very helpful. And certainly, the clients that have had to go to IRD for support have got that support. They’ve been able to put some arrangements in place and things like that. But bear in mind, I’m an atypical accountant as I’m not dealing with hundreds of clients, I deal with those who come to me who are looking for a mentor and coach.
But certainly, I am finding it seems to be a lot of help and support and it is giving a little bit of peace of mind to some clients. I’ve also had a client come to me and go “I actually think I do qualify for the wage subsidy, but I’m actually not going to claim it because I’ve got other resources and let someone else have it.” She looked at it very much from a values-based decision rather than “I just need the money, I’m going to take it”. I think it’s really great that there are people out there who are looking at it like that.
TB
Just thinking we’ve got an election coming up and all that hoopla going on. Last week I talked about National’s small business policy. https://www.interest.co.nz/business/106800/week-tax%C2%A0covid-19-related-measures-tax-losses-and-airbnbs%C2%A0national-releases-its
What would you like to see from the parties in terms of tax or small business policies coming forward for the election?
Lynda Moore
Yes, interesting question. I’m just starting to think elections and what’s happening now.
To me, that whole thing of the tax holiday is something that needs to be addressed. Whether it’s “you have to pay it to the tax department now” I don’t know, because what I see coming through to me as being the biggest issue is this year two in business and suddenly finding that tax. So, if there’s a solution for that. I know businesses in the first year tend to need that cash flow. But if there was something that at least encourages paying something towards that first year’s tax bill, I think that would actually help a lot of businesses because it would force them to think about tax.
TB
There’s a couple of things that Inland Revenue does have now which would help, the Accounting Income Method, AIM, https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/accounting-income-method-aim
and the GST ratio method. https://www.ird.govt.nz/income-tax/provisional-tax/provisional-tax-options/ratio-option But the take up of those has been very, very low because they’ve been so circumscribed by Inland Revenue. I think it’s been more concerned about the system being rorted rather than this. Those two options get clients into the groove very quickly of making regular payments of income tax and GST. I agree with you on that.
So smoothing out the transition into business and regularly paying tax would be good. One thing I recommend to some clients where we know the cashflow is predictable enough, is to actually put them on Pay As You Earn. So their personal tax is dealt with. You do lose some of the flexibility around the shareholder employee regime. But you deal with that paying tax matter.
Lynda Moore
I was going to say, if I have clients who are absolutely hopeless with money, PAYE is what I would suggest for them as well for that very reason. I just know they’re not going to be able to cope with provisional tax.
TB
Yeah. Provisional tax requires a lot of discipline. Any final tips for business owners? What’s Money Mentalist’s favourite tip?
Lynda Moore
My favourite tip is whatever you do, understand your money personality and your money behaviour and then surround yourself with people that complement it.
So go back to my Amasser/Spender personality and wanting to spend my way to growth. My lovely partner Simon, is the Amasser/Hoarder. He is the one who goes “Honey, are you really sure this is a good idea? Why don’t we do it this way?”
So it’s a balancing act of me wanting to put my ears back like a racehorse and go and “Hey, let’s explore other options.” So know your money style and know your numbers. Just know your numbers. How much income are you replacing? How much do you need to sell/earn to replace that income? Don’t go into it blind.
TB
“Know your numbers.” That’s very good advice. Couldn’t agree more.
Well, thank you very much Lynda Moore. That’s been fantastic.
That’s it for this week. Thank you for listening. I’m Terry Baucher and this has been The Week in Tax. Please send me your feedback and tell your friends and clients until next week. Ka kite āno.
10 Aug, 2020 | The Week in Tax
- Fringe benefit tax
- How workable is the Greens Party’s wealth tax?
- Is unemployment insurance on the cards?
Transcript
The new car sales results in July turned out to be something of a surprise, with 8,400 new passenger vehicles sold, which was more than 3½% higher than the corresponding July last year. However, overall passenger new car sales are down 23% over the first seven months of July of this year, which makes July’s results seem very strong.
What caught my eye about these results was that SUVs represented 77% of the new cars sold in a month. That’s the highest ever. Sales of SUVs have been growing in popularity for a variety of reasons. And one particular subgroup which has had strong growth in sales is the twin cab ute.
This brings us back to the question of the fringe benefit treatment of twin cab utes. This is a topic which we’re going to hear plenty more about as Inland Revenue gets round to thinking ‘You know, maybe we might need to collect some tax to pay for all this support we’re providing to the economy’.
Fringe benefit tax (FBT) is calculated in one of two ways. You can either take 20% of the GST inclusive cost price and apply that to the vehicle, or you can take the motor vehicles tax value, which is the original cost less the total accumulated depreciation of the vehicle as at the start of the relevant FBT period. That latter option, the cost price, comes down to a minimum FBT value of $8,333. You then tax the resulting value at the FBT rate, which generally speaking is 49%.
Now, just as an aside, the SUVs represent very good value for money, particularly twin cab utes. For $30,000 you can get a reasonably well spec’d vehicle. And this is one of the problems with electric vehicles – which represent an insignificant amount of new car sales – is they’re expensive. Consequently, because they’re expensive and FBT is driven off the vehicle value, it means that unless a company has made a very big commitment to the use of electric or hybrid motor vehicles and imposes some fairly stringent rules around their private use, hefty FBT bills will ensue. So, this is a major disincentive for their purchase.
Coming back to twin cab utes, the myth has been around for quite some time that if properly sign-painted, they represent work related vehicles and are therefore exempt from FBT. There’s plenty of anecdotal evidence I’ve discussed before about widespread non-compliance or non application with the rules around work related vehicles.
Inland Revenue hasn’t said anything publicly about this although we understand in the background an initiative was under consideration, before COVID-19 rather took its eye off the ball.
But a key point, which people must understand, that if a vehicle is available for private use other than travel from home to work or incidental travel, then it is not a work related vehicle, even if it is sign-painted. It is therefore subject to FBT. This is the bit which I think is going to potentially trip up a lot of tradies and other users of twin cab utes. You have to make sure you are compliant with the FBT rules around private use, which are pretty stringent.
As I said, this is a matter that I have talked about beforehand. Inland Revenue’s tools for dealing with this are much stronger now because it actively searches social media. At one tax conference an Inland Revenue representative said that if it saw someone put a photo on Facebook about going fishing and showing the ute towing a boat, it would happily drop a quick message through the myIR system to the effect of ‘Hey, we see you’re enjoying your fishing. Did you make sure you complied with the FBT rules?’ That’s very Big Brotherish, but it’s what it can do.
And so, you can’t say you’ve not been warned. I expect that we will start to see a significant increase in Inland Revenue investigations of FBT for the work-related vehicle exemption and twin cab utes.
The Green Party wealth tax plan
Moving on now into the election season. And some of the parties have released their tax policies. Others will either not do so or have already made it clear, as National has, that they don’t propose tax cuts or tax increases.
But the Green Party came out and announced as part of their Poverty Action Plan, a proposed wealth tax of 1% on net worth above $1 million and 2% above $2 million dollars net worth. (This is per person, by the way.)
Writing this week in the Herald, former member of the Tax Working Group, Professor Craig Elliffe, took a look at the Greens policy.
He noted that when things settle down, there’s quite likely going to be a requirement for more taxes to pay down some of the government indebtedness. And noting that the Tax Working Group itself had suggested that the tax system needed to look at the taxation of wealth and capital, Professor Elliffe then looked into the Greens’ proposals and raised the question whether a wealth tax was the best form to deal with these issues. And his short answer was no.
The whole article is well worth reading. Professor Elliffe pointed out that wealth taxes have declined in use: 12 OECD countries had a wealth tax in 1990, but only three -Norway, Spain and Switzerland retain them now. Add in Argentina and we’re talking about only four countries of any substantial size having a net wealth tax. You do however, find plenty of transfer taxes, such as inheritance tax gift duties.
And most of the OECD members also have a capital gains tax, although Professor Elliffe, for fairly obvious reasons, shied away from mentioning that.
Wealth taxes don’t raise much revenue was another of his arguments. And then there’s the whole question about tax integrity. What would happen in terms of tax planning, if attempts were made to introduce a wealth tax? I think that’s a very valid concern.
He also raised the question of jurisdictional flight. People may move out of New Zealand and move assets into and out of New Zealand and try and attempt to limit the wealth tax. All that is perfectly valid. But I can’t help but wonder whether the days of tax havens sheltering vast amounts of wealth, trillions of dollars in fact, are actually numbered.
Every country around the world now faces major pressures on its balance sheet, with lower taxes and greatly increased debt. So I’m beginning to think that we may see, just as we did in the last 10 years with the introduction of the Common Reporting Standards on the
Automatic Exchange of Information, a concerted move to end tax havens.
And that won’t happen overnight because obviously there will be very significant interests pushing back against that. But governments will probably look at the issue and conclude we cannot have trillions of dollars of assets stashed away where we can’t tax it at a time of such severe strain on our finances.
Now, Craig Elliffe finishes his article by noting
In summary, there is likely to be a strong need for tax revenue and standing back from the New Zealand tax system the under-taxation of capital is an issue for the variety of reasons set out in the Tax Working Group’s interim and final reports. Is a wealth tax the answer? I don’t believe so when there are other alternatives.
Coincidentally, the same week – the same day – the Financial Times published an article which basically said higher taxes are coming.
The article argues the paradigm that we’ve operated under for the last 40 years since 1980 of relatively low taxes and smaller government has been broken.
Since March, governments have rightly embraced enormous deficits to limit the collapse in economic activity, protect incomes and sustain employer-employee relationships. As a result, public debt burdens are rising everywhere to levels not seen for many decades, or even ever before. According to the OECD, many of its member governments could add debt worth 20 to 30 percentage points of gross domestic product this year and next.
This is going to force a simple choice on just about every government. They can tolerate the high debt burdens indefinitely, rather than try to bring them back down to moderate levels. Alternatively, they can permanently increase the state’s tax take to balance the books and start whittling down the debt. Either way, combining “responsible” policies on both debt and tax burdens is no longer an option…We may have to jettison both and learn to live with permanently higher public debt and permanently higher taxes.
The article goes on to cite the example of Japan which in 2000 had a tax to GDP ratio of 25.8% which was then well below the OECD average. This has now risen to 31.4%, which is still below the OECD average of about 34%.
And the article notes, “if Japan is a harbinger of the future for all rich economies, then expect public debt to stay high and taxes to move higher”. So that’s going to be a reassuring thought to be considering when we listen to what the politicians talk about tax going forward.
An unemployment insurance scheme coming?
And finally this week, something interesting popped up, which was also slightly related to a Green Party policy in relation to ACC. Grant Robertson, the Minister of Finance, raised the idea of a permanent unemployment insurance scheme.
Now, this is something that the ACT party has also advocated. As the Productivity Commission noted most OECD countries have some form of employment and unemployment insurance, which people can draw down for a set period of time if they lose their job. This tends to help people in employment on middle and higher incomes,
We don’t have unemployment insurance at the moment. Instead we have Jobseeker Support, which at $250 a week is substantially well below what the people who’ve just lost their jobs were earning. And that is why the Government introduced a special package for people who have become unemployed as a result of Covid-19 since February. Basically paying them close to double what’s available under Jobseeker Support.
Another option might be to significantly increase benefits, which is what the Welfare Expect Advisory Group recommended. But that, of course, means putting more strain on the government’s finances which leads us back to the question of whether higher taxes are needed.
And on that bombshell that’s it for this week. Thank you for listening. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time, ka kite anō.
29 Jun, 2020 | The Week in Tax
- A tax law change could be of major benefit to Kiwis with Australian superannuation funds
- Rethinking the taxation of redundancy
- Google’s 2019 results highlight the difficulties of taxing the digital giants
Transcript
This week, a seemingly arcane tax change could be of major benefit to Kiwis who have Australian superannuation funds, rethinking the taxation of redundancy and Google’s 2019 results highlight the difficulties of taxing the digital giants.
Right now, New Zealand citizens or New Zealand permanent residents are the only people who can get into the country. And as the news headlines over the past couple of weeks have shown, testing at the border has become incredibly important in ensuring that COVID-19 does not gain another foothold in the country.
What you are also seeing is a significant rise in the number of Kiwis wanting to return to New Zealand. There are approximately one million Kiwis around the world, including nearly 600,000 in Australia. And the way the pandemic has been handled so far has made many expatriate Kiwis look at returning to New Zealand.
And a significant number of those may come from Australia. Now Australia has compulsory superannuation under which you and your employer are required to make contributions to a superannuation scheme. Unlike KiwiSaver, where you can only ever have one KiwiSaver scheme, it’s quite possible to have a number of Australian superannuation schemes. And what sometimes happens is that people lose contact with their superannuation schemes or vice versa.
Under Australian law, after a while unclaimed superannuation money is required to be repaid to the Australian Tax Office. This could affect Kiwis who have returned to New Zealand but have lost their records relating to an Australian superannuation scheme. After a while the Australian scheme must pay the funds in that scheme to the Australian Tax Office as unclaimed superannuation money.
All this sounds a little arcane, but there are absolutely billions and billions of dollars invested in these schemes (A$2.7 trillion as of the end of the March 2020 quarter), and the amount of unclaimed superannuation money can be quite significant.
Since 2013, New Zealand and Australia have had a Trans-Tasman Savings Portability Agreement in place to mainly encourage or rather remove barriers to workers freely moving across the Tasman.
So the potentially significant amounts involved and the Trans-Tasman superannuation agreement are the reasoning behind a measure in the recent the introduced The Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill introduced a few weeks back.
The bill has a provision which is to allow the direct transfer of New Zealanders’ Australian unclaimed superannuation money from the Australian Tax Office into a KiwiSaver scheme.
This is a measure to get around the issue that once the Australian superannuation scheme deems the funds lost, it’s impossible under Australian legislation for Kiwis to get their money out.
Another handy thing to keep in mind, is that unlike the tax treatment of other foreign superannuation schemes, if you have an Australian superannuation scheme and you transfer it into a KiwiSaver scheme, you will not be taxed, even if that transfer happens more than four years after your return to New Zealand.
So, this is a measure which is favourable for those who have Australian superannuation schemes and may have forgotten what they’ve got and now want to bring the funds across. They can do so tax free into a KiwiSaver scheme. As I said this seems a little bit arcane, but it occurs to me given the numbers of returning New Zealanders we’re likely to see, this could become quite important over the next few years.
Taxing redundancy payments
Moving on, a few weeks back, I was talking to Newshub’s Madison Reidy about the taxation of redundancy payments. At present, redundancy payments are simply treated as ordinary pay and taxed at the normal rates, which means that for someone receiving a substantial redundancy payment much of it will be taxed at the top rate of 33%. I suggested this was something that needed to be looked at.
Based on an article in the Herald this week it seems that the Minister of Revenue, Stuart Nash, has received correspondence on the matter and is asking officials to look into it, which is encouraging to see.
The problem is given the circumstances we’re in right, now this sort of thing ought to be dealt with quite urgently. Maybe if we’re going to move forward with changes, it would be opportune to include some form of measure in the tax bill I mentioned earlier, which is going through Parliament right now.
One thing to think about regarding redundancy payments, is because they’re treated as ordinary pay, that means if you have a student loan 12% of the payment will be deducted. If you’re in a KiwiSaver scheme, then a further 3% at a minimum will be deducted and to your KiwiSaver scheme, fortunately, ACC does not apply.
So it could be if you’re earning above the $70,000 top rate tax threshold (which is roughly $1,350 a week) and you receive a redundancy payment, and then if you have a student loan and are also in a KiwiSaver scheme, you will lose 48% in deductions. This is why I feel it’s actually quite urgent given the circumstances we are in, that the government reconsiders the current tax treatment of redundancy.
There’s an additional bite to this for those who might receive a payment of over $30,000 before tax. This group of people are not eligible for the COVID-19 income relief payment. This is the special relief benefit for anyone who’s lost a job because of COVID-19 between 1 March and 30 October 2020. Such persons are entitled to a weekly benefit payment of $490 if they were working for more than 30 hours. The payment is untaxed and is nearly double the payment someone would normally receive who is unemployed. Fortunately, MSD has lifted its requirement for someone to spend all their redundancy before they can apply for the job seeker payment of $250 a week.
Nevertheless, the current tax treatment of redundancy needs to change urgently. But it can only be done by a statutory amendment. So, it would be good to see Inland Revenue and the Minister of Revenue moving quickly on this to make a change to help those who are going to lose their jobs or have lost their jobs in the past few months.
Taxing Google
Google New Zealand not so long ago released its financial statements for the year ended 31 December 2019. These show that its income tax bill has risen to $2.4 million.
Now, Google’s 2019 accounts were the first ones prepared as part of its more transparent country by country reporting. The accounts showed that its New Zealand revenue had increased significantly since previous years to $36 million with a pre-tax profit of just over $10.6 million.
What the accounts also show is the difficulty of taxing the digital giants and how little revenue will come through for income tax purposes. According to the accounts the pre-tax profit of $10.6 million represents the value of sales less the direct costs of sales for its advertisements and cloud services. And tucked away in the financial statements, was a note that well over $500 million was paid in service fees to related offshore parties.
And this shows the problem with the digital economy. Because so much is now driven off intellectual property, and New Zealand is at the tail end of the world in Google’s case we don’t create much intellectual property. Our right to tax is therefore quite limited.
This is not a problem unique to New Zealand. All around the globe countries are grappling with this question that Google and Facebook are piling up billions of dollars in earnings, but not much income tax is being paid in the relevant jurisdiction.
To deal with this matter the OECD has been working on a coordinated approach. The problem is, in the last week or so, that it’s hit a big hurdle with the US Treasury Secretary, Steve Mnuchin, withdrawing the US from the negotiations. Presently the United States and Europe are at pistols drawn stage, arguing over the question of digital taxation, and Mnuchin and the US pulled out of talks in the last week. This is not good for the whole global economy, and it’s not good for moves to try and get a fairer share of the enormous revenues Google and other digital companies generate.
The Tax Working Group recommended going along with the OECD approach. But it also said that we should have a digital services tax ready to go if negotiations do not go well. We’ve also been watching what the Australians are doing and for the moment they have backed off a digital services tax. But over in Europe, then Britain, which needs a trade deal with the United States, has actually introduced a digital services tax. The French have got one up and running and the Germans are talking about one, too.
So international tensions are building on this and it’ll be interesting to see what the Government decides to do over the next few months as this plays out. But as part of the general upheaval in the tax world going forward we’re going to be seeing this development with the US pulling out of the talks with Europe is not a good one. We’ll monitor developments as they happen, but for the moment it looks like tensions will continue to escalate.
Well, that’s it for this week. Next week, I’ll be joined by Josh Taylor of tax pooling company Tax Traders. We’ll be discussing how tax pooling was able to help businesses’ cash flows in the past few months.
Until then, 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.
