Are extra expenses and use of personal assets to work from home deductible against your taxable income? As usual with tax, its complicated.
We’re in week three of the Lockdown, and although the Prime Minister has indicated there may be a possible shift to Level 3 from 22nd April, a majority of employees may still be required to work from home even after that shift.
Naturally, employees will be incurring expenses in carrying out their employment duties. And the question arises, can they claim a deduction for these expenses? And the short answer is no. The Income Tax Act specifically precludes a deduction for “An amount of expenditure or loss to the extent to which it is incurred in deriving income from employment. This rule is called the employment limitation.”
This is a longstanding prohibition which has been in place since the mid-1990s. It was introduced as part of a simplification of tax return filing requirements. Instead, what is to happen is that the employer needs to reimburse employees for such expenditure. The employer will be given a deduction for the relevant expenditure and it will be treated as exempt income of the employee.
But what potentially could be deductible? The Inland Revenue guidelines for businesses with home offices are equally applicable for employees working remotely.
These guidelines allow a deduction of 50% for the rental of a telephone line, if it is also a private line which is used for business. Obviously specific business calls would be deductible. With regard to Internet costs this depends on the plan and the business proportion. How that is determined is a matter of some judgement. In addition to these costs, the business proportion of household expenses such as rates, power, rent or mortgage interest expense could be claimed.
Generally, the business proportion is calculated as the area set aside for use as an office over the total area of the house. For example, if an employee has an office which is say, 10 square metres of a 100 square metre house, then the deductible proportion is 10%.
There’s an alternative option of using a fixed rate as determined by Inland Revenue based on the average cost of utilities per square meter of housing for an average New Zealand household and applying it per square metre of the office area.
For the 2018-19 income year the rate was $41.70 per square metre so in the example above the deduction would be $41.70 x 10 or $417. It does not include the costs of mortgage interest rates or rent and rates. These must be calculated based on the percentage of floor area used for business purposes.
All of the above is perhaps easy enough where a person has a dedicated office at home, but as no doubt is happening all over New Zealand right now, employees are working on kitchen tops, dinner tables and out of bedrooms. What happens in these instances?
As the area being used cannot be said to be entirely dedicated to office use, a full deduction based on these apportionments is probably not available. The area of the room used for non-business purposes for example a bed or other furniture should be excluded. Arguably the deduction would be time-limited (for example, if it was only in office use for 8 hours a day, then only one-third could be claimed).
For the employer, they may be able to claim GST on the relevant proportion of GST expenditure claimed using the standard apportionment methodology, if the employee provides invoices. At this point the employer is probably thinking this is getting needlessly complicated.
A more practical approach would be for the employer to simply pay a flat rate allowance to employees. This is allowable if the allowance is based on a “reasonable estimate”.
The other potential issue is fringe benefit tax. Theoretically, FBT applies on the private use of tools such as mobile phones and laptops. Fortunately, there is an FBT exemption if the laptop or mobile phone is provided mainly for business use and the cost of those laptops and mobile phones is no more than $5,000 including GST.
All of the above represents a compliance nightmare for employee employers and possibly a target rich environment for Inland Revenue in a future date where it considers that the allowances paid, or deductions claimed for home office expenditure, have been excessive. In this instance the employer will be liable for the PAYE which should have been deducted from the amount determined to be excessive/non-deductible.
In practical terms, Inland Revenue might simplify clarify a lot of issues for employers and employees alike by issuing a determination setting out a flat rate amount of expenditure it would consider acceptable. An employer could pay above that amount but then PAYE would be applicable.
Of course, all of the above is somewhat hypothetical, if the employer has no cash flow to pay any such allowances. I suspect that is the matter employers are most concerned about right now. In the meantime, let’s hope we can return to a new normality soon.
This article was first published on www.interest.co.nz
Progressive taxation on biological methane is John Lohrentz’s proposal to the New Zealand government as a tool to transition to a low carbon economy.
This week we look further into the importance of environmental taxation I raised last week, my first guest for this year is John Lohrentz, who works at the intersections of sustainability, social impact and tax policy.
John caught my attention because he was the runner up in the 2019 Tax Policy Charitable Trust Scholarship competition with a proposal on a progressive tax on biogenic methane emissions in the agricultural sector.
Welcome, John. Thanks for joining us. So, what exactly are biogenic methane emissions and what is your proposal?
Yeah, well, I suppose the first thing I just want to say is thank you for having me. It’s great to be here. The discussion on environmental taxation is obviously something that I’m quite passionate about.
So, to give you a sense of what my proposal covers, I started from this thinking around the centrality of agriculture to our economy and to our way of life in New Zealand. And I started to look at what was happening over the next 10, 20, 30, 40 years.
There were a couple of trends that start to really stand out to me. One was that as the impact of climate change grows, it’s going to change the conditions for farmers. And those changing conditions are going to have impacts on how we farm and how we need to adapt our farming practices for our new world.
I also was looking at the fact that our population is going to grow by about 2 billion people globally in the next 30 years. This is going to create challenges with food security and at the same time as consumers are also demanding really new and different things. We’re seeing the rise of alternative proteins, of different milks and also a desire for better types of meat and better dairy products at the same time.
Looking at all of that, I start to just look at the agricultural sector and dairy in particular and what the future transition needs to look like. And I became quite convinced that actually really pushing ourselves towards more innovation in the agricultural sector is going to be key for the transition as we go into a low emissions economy and thinking about that.
I thought actually one of the ways in which we could quite effectively finance that move towards a more innovative agricultural sector is through a progressive tax on biological methane emissions. And basically, what my proposal is, is to look at the way in which instead of us taxing, in essence, the gross emissions of farmers at the farm gate, what we could look at doing is actually setting a tax that is built around the target.
What we do is over time, we reduce that target towards our 2030 goal and the Zero Carbon Act and our 2050 goal further on. And then the challenge for farmers is to keep up with that rate of change. And for farmers that meet or exceed that rate of change, there should be a net benefit to them. They should actually be getting money back through this proposal. And for those that are behind, a tax is applied progressively to recognise they’re actually at the further ends of the spectrum, where you can pick out the easy early emissions reductions.
And I think one of the big benefits from taking this approach is that we actually take this idea of being penalised for your emissions out of the equation. And the question is actually per either acre of land or per 10,000 litres of milk, the produce or whatever measure we want to develop, what is the level of emissions for that production? And this gives us a way forward of talking about the idea of actually maintaining or increasing production while we look at ways to de-carbonise how we do that.
I mean, that’s what I find really compelling about your proposal. In essence it’s a behavioural tax. But it’s not a sort of a sin tax, like tobacco duties, etc. where the idea is to eliminate behaviours. Your proposal is to use tax as a tool to encourage a change, because like it or not, agriculture is incredibly important to the New Zealand economy and will remain so.
And tax is a dirty word in this. But the key thing you’re doing here is picking up a theme that Sir Michael Cullen raised, and I was very intrigued by as listeners to the podcast will know. He talked repeatedly about the opportunity of using environmental taxation to recycle in and help move towards the lower emissions economy. That’s a key part of your proposal.
Yeah. I’m actually really glad you mentioned the Tax Working Group because obviously they had some things to say about environmental taxation. And I think one of the things that stood out to me from their report is that they built this framework for environmental taxation. They said these are the kind of things that we think an environmental tax would need to do in order to be a good idea, essentially.
One of the key things that they looked at is there kind of an elastic relationship between introducing this that’s going to have some behavioural sort of impact. And their analysis of emissions-based taxes is actually yes, there is some responsiveness there. This is a good area when we talk about greenhouse gas emissions to introduce taxation and then recycle the revenue back into the place where that’s coming from. The classic example might be something like a fuel tax in Auckland. The idea is if we’re taking the fuel tax out of Auckland, you put that money back into transport at the same time.
The other thing that I was quite interested in was the Parliamentary Commissioner for the Environment’s Report on farms, forests and fossil fuels, which came out last year.
You cite that report quite substantially in your proposal.
I really enjoyed it. And I think I think the reason it was quite gravitational for me is it was the first time I really clicked on the reality that we talk quite broadly about carbon or about greenhouse gases. But actually, there’s some real differences when we talk about methane as opposed to carbon dioxide as opposed to synthetic gases or nitrous oxide. And they all have different ways in which they impact on our climate.
Obviously, I’m not a climate scientist. I’m a tax interested person who is coming to an understanding of this. But in very general, in basic terms, a ton of methane that’s put into the atmosphere has a very, very strong impact initially. And then over time, that impact actually falls off as the gas is basically broken down in the atmosphere. Whereas if you emit carbon dioxide, the impact is lower initially, but it stays in the atmosphere for several hundred or even thousands of years.
When we start to think about how we design good policy, I actually think the beginning point for us is that we need to start with the science and have a really strong understanding of the different ways in which these gases are having an impact on our climate and then build back from that into actually thinking about the different ways in which we can approach these gases.
And that’s actually one of the fundamental parts of your proposal, because what caught my eye when you’re looking at this, because people right away will say “Another tax! We’ve already got to deal with the emissions trading scheme!”
In your proposal, you’re saying take methane out of the emissions trading scheme and deal with it separately because of the science behind it. Do you want to talk a little bit more why you think that change in the ETS is important in this regard?
Yeah, I mean, first of all, I think it’s really important for me to say that I’m really happy to see the work being done on the emissions trading scheme. And also, I in no way consider myself an expert on it. But when we talk about interventions, when it comes to reducing emissions, the two broad ideas either are creating a price mechanism or this kind of cap and trade system, which is the emissions trading scheme.
And there are some real benefits from the emissions trading scheme if it’s done really, really well, which is if you include all the industries, all the types of gases, then you can kind of get to this point where you have a working market, to speak, for emissions. The problem is, is that if you have that one price, single price, there’s a risk that we actually distort the decisions we’re making about where we put the most of our energy in reducing emissions, recognizing that difference in the profile of different gases.
This idea that action in different ways is all substitutable so reducing a tonne of carbon is the same as reducing certain amount of methane I think is problematic. And Simon Upton the Parliamentary Commissioner for the Environment points that out.
Some of the proposals that have come out from the Interim Climate Change Committee,
Ministry for the Environment and also some of the work done by the Productivity Commission earlier last year has looked at this. They said, well, there are definitely some pros and cons to running with the emissions trading scheme and building on what we already have or looking at the opportunity to introduce a tax or levy. And the Interim Climate Change Committee actually recommended let’s go to Malta was a levy when it comes to methane emissions from agriculture, because the profile of it is really different. And it’s also really important for us to recognize the centrality and the primacy of agriculture in our economy.
Just on that a levy would not gone down well with farmers straight away. And so what you’ve gone said, well, let’s go and look at methane. And there’s two parts to it as I mentioned earlier. There is a tax on emitters of methane above a certain threshold. But more importantly, you propose recycling the tax through Research and Development tax credits.
Absolutely. And if I if I was to try and articulate how I would actually talk about my policy to people, I think I would start by saying this is a focus on innovation. And I think the tax mechanism, as useful as a way of talking about how we raise revenue to support that in a potentially innovative and effective way. But really the central focus of what I’m proposing is a 40% targeted tax credit for R&D in the agricultural space.
I did some work with numbers from Treasury and other places to kind of get a sense of how we can make this work. And it looks like one way we could do this is we could use the tax revenues we collect and split them reasonably equally between this R&D tax credit, but also a refundable tax credit to farmers who are below that threshold I talked about earlier.
The idea would be for farmers who are really pushing to operate sustainably instead of having a tax payment because they still have some gross emissions, the fact that they’ve done work and really put some effort in is recognized and is actually a value that they receive back as a refundable tax credit. And then at the same time, we’re stimulating some of the technological advancements we need to really reduce emissions, which should accelerate the whole journey of the industry.
And this is something that’s been talked about, the wider perspective by Fonterra and other is that if we can innovate in this space, the global potential is enormous, absolutely enormous, particularly because of the methane emissions. So, yes, that’s another reason I found it’s an extremely interesting proposal.
Can I talk to that a little bit more? One that one thing I’ve been reflecting on in preparing for our discussion today is the Tax Policy Charitable Trust scholarship competition.
Immediately following [the announcement of the finalists] the next day I was in Wellington and it was about a week after the Zero Carbon Act had been passed. I was just walking on the waterfront and quite a large group of people who were gathering ready to walk to Parliament for a protest. And it became quite evident quite quickly that this was a group of farmers that had come from all over the region and wanted to deliver their message to some of the some of the ministers. And I had the opportunity to walk and talk with some of them.
And one of the things that was just really impressed upon me through all of that discussion that I had is that this is an issue that is incredibly important to farmers. And I actually think our way forward when we start to talk about tax in this area is that we need to sit down at the table together and really have the opportunity to air the concerns of farmers because they’re working really hard and they’ve seen compliance go up and up over time. And actually, it’s been a very challenging industry in practice to be part of for the last couple of decades. You know, there’s been benefits, has been growth, but at the same time, farming is a challenging profession.
Your report is full of little insights in there, which should encourage everyone to think about farming. For example, the current level of indebtedness in the farm sector. What is it? 35 per cent of farmers have a debt to income ratio per kilo of milk solids that’s more than five to one?
It’s about $35 of debt for every kilo of milk solids. And they may have changed since I wrote my proposal. But I think what it goes to illustrate the fact that over a third of farmers are living with that really high debt is a real strain. And that number specifically is with the dairy industry. I think what that indicates to us is that there are some people who are doing really hard work. And the problem with that debt is that at the end of the day, there’s a lot of other factors that can impact on the milk price. As it is you can do a huge amount of work and then barely breakeven even in a good year.
If we bring an integrated lens as to how we think about that journey towards sustainability, is we also have to be really thinking about the well-being of our farmers through this transition and all of the financial factors that actually go into making that sector successful. I think there’s a lot of really good stuff happening, and we just need to carry on and be really clear as to how we how we have this conversation together.
Yes, I quite agree. We were talking off-air about this risk of the town versus country divide you hear about. And one of the things I think that makes what you’re proposing interesting and compelling is it addresses those issues because it encourages behaviour. It’s not ‘You’re naughty, you must reduce that’. You’re saying those who move along this path to lower emissions will get refundable tax credits and the innovators will get rewarded.
And that then points the whole industry away from this volume-based model. As I mentioned, with a debt of $35 per kilo of milk solids and the price at seven dollars, the ratio is five to one. But if the milk solids price goes down to six dollars, suddenly that ratio six or seven to one. It’s a hell of a risk to carry. And the banking sector, as farmers well know, is starting to draw back from lending to the dairy sector. Sale prices for dairy farms are flat as well. So, there’s a number of pressures coming on for the sector.
I think one of the pieces which is really point for me to acknowledge is I think our long-term future remains as an agricultural nation. I mean, especially when we think about the success of our regions, farmers are really integral to that. And I think that there’s this really incredible opportunity with how demand is shifting, especially overseas, to really champion the cause of highly sustainable agricultural products in all their forms.
I couldn’t agree more. On transition you talked about 2030 as a target, but you are saying that about 30% of farmers are already meeting your proposal’s targets.
These are my estimates so they’re not perfect. I think there’s definitely some more work to be done to understand how this is looking. But just taking the dairy industry, for example, the kind of spread of emissions per 10,000 litres of milk produced at the farm gate basically follows a normal distribution, but with a little bit of a fat tail towards the heavier emitting side. I looked at this and the targets we’ve set ourselves as a nation now through the Zero Carbon Act.
And actually, as of when I wrote my proposal, about 14 per cent of farmers are already below the rate that we want to achieve by 2030. And so, it’s a move to try to move towards achieving our target, which is about 10 per cent reduction in methane emissions by 2030.
What it would look like is about half the farmers in the sector activating quite strongly so we move from about 14 per cent below that threshold to about a third of farmers, definitely below their threshold with a heavier tail kind of moving more into the mid-range. And I think that’s entirely achievable.
When the Biological Emissions Reference Group reported in 2018 they said that based on a lot of the technologies and practices we already have in terms of best practice for how to run a farm they believed it was possible to get that 10% reduction even if we don’t see some of the technological breakthroughs that we’re hoping to see in the next 10 to 20 years. So, even if a methane inhibitor or a vaccine is not developed, we can still definitely get to our 10% target reduction. But the reason I think we need to invest in innovation now is because that’s what’s going to give us the ability to unlock our success towards 2050 on a longer timeframe.
And these are long run investment projects, to be quite frank. You mentioned the work the Tax Working Group did in outlining a framework we need to work on. What other environmental taxes do you think we could be seeing coming along following that framework?
That’s a great question. The Tax Working Group’s looked at obviously emissions as we’ve already talked about. And that was both from the perspective of a potential tax, but also the emissions trading scheme. They also looked at some of the existing environmental taxes we have, which are around solid waste such as the waste disposal levy. They looked at water abstraction and water pollution and then they also looked at congestion taxes. Then they started to foray a little bit into more novel taxes. There was some discussion around this idea of an environmental footprint tax or a natural capital enhancement tax. Leaving those last two aside, I do think that there is some potential work to be done in that space of taxes on water abstraction/pollution, solid waste and congestion as well.
These are all really interesting issues. But at the same time there is a confluence of potential environmental impacts, financial impacts and also social impacts from all of the decisions we make around that. And one of the things I appreciated about how the Tax Working Group approached this question of environmental taxes is that they were very clear that our goals in the short and medium term should be quite different from our goals in the long term.
Looking long term, what we need to be focussed on is actually how do we build up a new framework of environmental taxation that could be a stronger base for our economy and that could potentially take some of the pressure off other areas like, for example, income tax.
And that’s going to take some serious work because we don’t just need a framework. We need a whole new way of thinking of how we structure the design for how we do this well to ensure that it has equity both in the temporal sense and also a distributional sense. I think that’s the big work to be done. And we can definitely start that now. But it’s going to take time to build that framework out in the shorter term.
How the Tax Working Group thought about environmental taxation largely focussed on this idea of internalizing negative externalities. I think that there’s definitely some work to be done there to ensure that where potential environmental damage is occurring through pollution or water abstraction or other avenues, that there is more focus put on ensuring that people who are doing that are paying for that.
However, I think we need to move quite slowly and also recognize that our thinking on what natural capital is and how to best protect that is just evolving. There’s more work to be done to actually develop that theoretical base for how we approach this. We shouldn’t just kind of gung-ho go ahead into establishing all these new taxes. I mean, the reality is, is right now environmental taxation revenue is about 6.2% of the Government’s budget. And I definitely think that can go up. But the way in which we do that and think about the kind of counterbalancing that we do at the same time is very, very important.
On environmental tax the OECD recently released a report on taxation of energy, which in fact was highly critical of just about every country for their approach to taxing energy and the inefficiencies from that. What’s your thoughts on the OECD approach?
Obviously energy is really central to our progression towards a low emissions economy. The idea of where do we actually get our energy from matters because everything we do uses energy in different forms. I think we’re doing quite well in New Zealand with at least 80% or 85% renewable for a lot of our sources, especially around Wellington where I think it’s close to 100% renewable now.
I think some of the challenges that are going to be really central for us over the coming couple of decades are going to be first of all focussed around different industries. I’ve chosen to focus on agriculture because I think it merits the time to spend a lot of our energy thinking about how the sector engages. I think also transport is going to be very interesting and I think forestry will be the element where there’s some real important conversations we need to have around what role forestry plays in our transition.
Yeah, you mentioned forestry in your proposal, because just to pick up a point you mentioned earlier, one of risks about the ETS is we could be busily reforesting areas because that gives a good initial short term answer in terms of meeting emissions targets. But longer term that may not be the most efficient use of the land.
This is also coming from the Parliamentary Commissioner for the Environment’s report where there are some really interesting discussion going on about the expectations we have around the usefulness of tree planting. And the key thing that the Commissioner said essentially was we don’t want to get to a point in 2050 where essentially what we’ve done is scored a net accounting victory. We’ve got to near zero, but we actually haven’t done that really hard work to really decarbonise the emissions in our economy.
And just to be clear, I’m a gardener, I love gardening. I love things that grow. And from that, I have a very strong preference for this idea that we should be planting. We should be going for it. Native trees everywhere, just plant, plant, grow, let things reforest and go for it. I think the bigger challenge is looking at the whole picture and saying we can’t just pay for our sins and carry on committing them.
There’s this need for all of us to be responsible for playing our part, whether at the business level, economic level or personal level to reducing some of those emissions.
I couldn’t agree more. And what I liked about your proposal is it encourages change, encourages focus on the issue. It encourages innovation, which for an agricultural economy like New Zealand represents a huge opportunity. This is a classic case of looking at an issue and turning the telescope around to say, “OK, there’s an opportunity here for us. How do we manage that transition?” I commend John’s paper to you all.
I think that’s a really good place to leave it there. John, thank you for joining us.
Fantastic, thanks for the opportunity to have a discussion. I’m looking forward to more in the future.
Me, too. This will no doubt be the first of many environmental discussions that we’ll be having over the coming decade.
Well, that’s it for the week in tax. 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.
- 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
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.
- What might a possible digital services tax look like?
- What to do before the tax year end on 31 March 2019
- Inland Revenue’s latest instalment of its ongoing $1.5 billion business transformation.
It’s Friday, the 22nd of March. Welcome to This Week in Tax!
I’m Terry Baucher. I’m a long-time tax nerd and director of Baucher Consulting Limited – a tax consultancy whose aim is to bring better tax stories for you and a better tax system for everyone.
This week in tax, we’ll take a longer look at how a possible digital services tax might look; we’ll give you a heads up on what you need to do before the tax year ends on the 31st of March; and look ahead to the Inland Revenue’s latest instalment of its ongoing $1.5b business transformation program.
Events this week in New Zealand have been dominated by the terrorist atrocity in Christchurch. In the wake of that, quite a few people – myself included – took a long look at what exactly the digital companies such as Facebook; Google, owner of YouTube; Twitter; Reddit; and Instagram had actually done in reaction the atrocity.
The worst part of it was it was livestreamed. In the wake of that, pressure has gone on to those companies. Westpac, for example, is one of many, many companies that has withdrawn its advertising from social media.
Writing for The Spinoff, I suggested that another alternative would be to take out the good old-fashioned tax hammer and use a digital services tax. This is a tax that is applied to the digital revenues of one of these digital companies.
I suggested, for starters, the rate of 20 percent could be applied, retrospectively, with effect from 1:30 pm on Friday, the 15th of March, just before the attack on the Al Noor Mosque began.
Digital services taxes are actually a growing trend around the world. The UK has announced one in November. In March, just two weeks ago, France was the latest country to join India, Italy, and the UK in introducing or proposing a digital services tax or DST.
France has followed other trends by suggesting that it would be about 3 percent of the digital revenues that could be identified in that country. Inland Revenue here could identify that by simply asking, using its powers under the Tax Administration Act, to ask all companies to provide details of how much they have paid to the various digital companies over a period of time, but it’s estimated notwithstanding that Google may have about $600m of the $1b annual online advertising in New Zealand.
Everyone is rattling the sabre on this. The hesitation about implementing it is because of the ongoing Organisation of Economic Co-operation and Development’s base erosion and profit shifting plan which is designed to try and give a coherent approach to taxing the digital companies, but that is an OECD multilateral negotiation, and these things take time – like many multi-headed trade negotiations. I think that the controversial Trans-Pacific Partnership trade agreement took all of ten years to negotiate.
Even though this space is moving quite fast in tax terms, it could still be another three or four years before there’s any international agreement. The fly in the ointment is that the US is a party to that OECD.
Guess who provides large amounts of funding to congressmen in the United States Congress? The digital companies. They are not going to lie down about this, so relying on action from the OECD is unlikely to produce quick results. Hence, other jurisdictions – France being the latest – will look at digital services tax.
I suspect that, if Facebook and the rest continue to drag their heels on this, unilateral action will become the norm. In that space, New Zealand should be positioning ourselves which is something the tax working group suggested and, just last month in February, the government said that it was going to move that way ahead. It’s more of a warning shot. We haven’t seen any concrete proposals on that. We haven’t seen a discussion document. But I would say, “Watch this space.”
As I said in my piece with The Spinoff, if you want to change the behaviour of the digital services companies so that they take down vile and objectionable material as quickly and as soon as possible, then you hit them in their pockets. A hefty digital services tax concentrates their minds wonderfully.
Moving on, the end of the New Zealand tax year for most people is just a few days away. Here are a few tips for getting yourself organised beforehand. Critically, many of these are pretty routine such as, if you’ve got stock, write it down to a fair market value now; otherwise, you’re going to be taxed on the value of the stock at the 31st of March. The same goes in professional services such as work-in-progress. Either bill it or write it off before the 31st of March.
Another typical thing to do is look at your fixed assets. Some people write the ones that have been scrapped which have been on the books and have not been cleared off the books or are no longer really effective. Or perhaps think about bringing forward some expenditure because you can always write off up to $500 on an asset – as long as you don’t buy too many of them at the same time.
This year in particular, for residential rental property owners, we are about to see the introduction of loss ring-fencing from the 1st of April. Now, to be quite frank, the legislation is to be a bit of a dog’s breakfast at this stage, but it is supposed to come into effect from the 1st of April. From that date onwards, losses incurred by residential property owners will not be available for offset against other income.
The thing to do before the 31st of March is to maximise your deductions so that you can utilise any available loss offsets this year. A particular point people should look at would be repairs and maintenance. Don’t put off repairs and maintenance until next week or two weeks’ time. Get the deduction now. Get it done now. Not only that, you’ll also earn the gratitude of your tenants.
Other things to think about as well that are very important before the 31st of March is for directors in companies to check that their shareholder current account or directors current account is not overdrawn. Otherwise, you are going to attract an interest charge of 5.9 percent from the IRD.
Finally, look to file your tax return before the 31st of March because, if you don’t, you give the IRD of a year in which to look back at your affairs if you’ve made any errors.
Looking ahead, Inland Revenue is about to release – in mid to late April – its next part of its business transformation program. This is a $1.5b overhaul of its computer system and of how Inland Revenue operates.
A computer system called First which it has been using was introduced in the early 1990s and has somehow managed to clunk along for 25 years. It’s been long overdue for replacement. This is probably five years late based on what I’ve seen.
But, anyway, Inland Revenue is moving on this and it’s now about to make the biggest step forward yet with what is called Release 3 which affects all individuals on “pay as you earn”. This is the one where the Inland Revenue have been advertising that people will be starting to get automatic refunds or an automatic square-up at the end of the year. It’s a big initiative.
What’s going to happen is that Inland Revenue will shut down on the afternoon of Thursday, the 18th of April, the day before Good Friday. It will reopen on the morning after ANZAC Day, Friday, the 26th of April. During that time, it will overhaul and transfer across the millions of records it has, run some live tests, finish some final live tests of its program, and then open for business on the 26th of April.
From that point onwards, people who are on “pay as you earn” will be automatically sent a square-up at the end of the year, and this will involve most people. More than one million people will get refunds, but about another 150,000 will get tax payments for the first time ever. These refunds will vary. Some may be as little as $10.00. Others could be quite significant because of the effect of working several jobs and being overtaxed through secondary tax.
Also, it’s important in this space that secondary tax which is applied where people are working two or more jobs now affects at least 600,000 New Zealanders. The idea is that Inland Revenue, together with something called “payday filing” where employees report online any pay on the day that they pay it. Inland Revenue will use this new information and its new super computer system to accurately calculate what a person’s tax liability is basically live each year.
I actually spoke to 95bFM about that earlier today on the matter.
This is going to make a big difference for a lot of people. It should put, for a lot of people, $5.00 to $10.00 more in their back pockets, and it means that they will not need to wait for until the end of the tax year before they can get their refunds. It puts the tax refund companies out of business. Most of the 30 or so of those companies have folded their tents, while a few have adapted their business model.
I would encourage people to practice patience on this. Although it’s a huge change, don’t be expecting that you’re going to be getting your refund on the 26th of April. It won’t work as quickly as that. Inland Revenue will work through their system and it probably will take about 10 to 12 weeks before they’ve worked through the approximately two million records they expect to be doing so.
But it is a big step forward, and it will be interesting to see how it pans out. They actually expect something like 1.8 million calls to them between the end of March and the end of June – basically, over a three-month period. We shall see how they cope with that. They have taken on extra people and they’ve reconfigured their systems for this, but it’s going to put a lot of stress on the system, so I’d urge people to be patient.
We’ll be watching as tax agents because this will affect us and there’s keen interest because, if it doesn’t go well, we’ll be the first people to see it.
That’s been The Week in Tax.
I’m Terry Baucher and you can find this podcast on my website – www.baucher.tax – or wherever you get your podcasts.
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Until next time, ka kite anō!