The Greens announced their tax proposals a week ago, last Sunday.
And my reaction was, “These are very bold.” They proposed major tax cuts at the lower end, meaning 95% of taxpayers will be better off under the Greens. Those cuts are paid for by increasing the top tax rate to 45% and increasing the 33% tax rate to 35% as well. These increases are part of the trade-off for the proposed nil rate band of $10,000, which no doubt will be very popular. As is well known, many other jurisdictions have something similar and given the fact that nothing has been done in relation to indexation of thresholds for well-nigh 13years now, it’s unsurprising that the pressure is built up, particularly at the lower end, to change the tax rates.
But most of that got swept away by the Greens controversial wealth tax proposal. In summary, there are two parts to it. Any individual whose net assets, net of mortgages for example, exceed $2 million will be subject to a wealth tax of 2.5% on the excess. For family trusts there is no nil rate band or threshold at all. It’s a flat 1.5% which is a deliberate anti-avoidance mechanism.
Latest Inland Revenue data on trusts
Trusts were used to avoid the impact of estate and gift duties in the past and are used in other jurisdictions to mitigate the impact of wealth and estate duties. So, the Greens have targeted this avoidance. Coincidentally, last Saturday the New Zealand Herald published a piece including details of the trust tax return filings made to Inland Revenue for the year end 31st March 2022 which indicated the value of assets held in trusts. The net assets of the 201,100 trusts which reported, was just over $300 billion. So at 1.5%, theoretically that’s $4.5 billion dollars straight up there.
Incidentally, what that Inland Revenue report doesn’t show is the non-reporting trusts, those are likely to be quite significant. We really don’t know how many trusts there are in New Zealand, the best estimates are somewhere between 500,000 and 600,000. Many of the non-reporting trusts don’t do so because they have no income, but they hold assets such as the family home. So, family homes that have been held in trusts may now be subject to the Greens’ proposal.
Now this kicked off quite a storm, which I watched with a little bemusement because the Greens first of all have to put themselves in a position of such leverage that its coalition partners, almost certainly Labour and Te Pati Māori, agree to the proposal. And then somehow between 14th October, the date of the election, and 1st April next year, the legislation to introduce all of this is drafted and passed through Parliament. So ,it’s a big challenge ahead.
But it caused quite a stir, and I fielded several calls from people concerned about what they saw here, trying to get an understanding about it and my views on it. At our Accountants and Tax Agents Institute New Zealand’s regional meeting on Tuesday we had a very lively debate around the question of this wealth tax. Normally, a lot of the time we’re talking about what’s in the legislation and whether Inland Revenue ever answer their phones again. All this I think shows the impact of the proposals, even though in theory they affect only a small group of people, the top 1%.
But there is substantial wealth locked up in property. We know that from digging around the official figures. For example, Auckland Council estimates the rateable value for all property within the Auckland Council region will be over one trillion dollars as of 30th June. Obviously, not all of those would be subject to a wealth tax.
What’s being suggested by other parties?
But I thought it was interesting that people are taking the Green’s proposals very seriously. The income tax shift to 45% on income over $180,000 won’t be terribly popular. But at present, the proposals that they’ve put out for the income tax cuts would affect many more people and benefit many more people, all those earning under $125,000, which is something like just over 4 million people. This has a broader impact than either National or Act’s proposals.
It’s quite interesting now as the election comes ever closer, we can start to see the tax policies of the various parties taking shape. The Greens are raising a substantial amount of tax to deal with poverty. Act is proposing tax cuts and it’s taking the ideologically opposite approach of substantial cuts to spending in order to achieve its top rate of 28%.
TOP, The Opportunities Party, are putting out a policy which has a land value tax, and they also propose tax increases at the higher end together a nil rate band and also substantial tax cuts at the lower end.
We haven’t yet heard from Labour on what they would do. Over on Twitter @binkenstein put together a graph comparing the various parties’ proposals so far.
So, the debate has ramped up quite a bit. Obviously, the Greens wealth tax is the most controversial part of it, but the other part which really got very little commentary but is equally controversial, was a proposal to raise the income tax rate for companies from 28% to 33%. More than most of the Greens’ proposals, that would probably produce a certain frisson of tension amongst multinationals. They may look and think “Maybe we might not increase our activities in New Zealand” or they may ramp up what they try and do under profit shifting.
Anyway, it all made for a very lively discussion all round. As I told people, wait and see. But it is interesting to see the pressure point for those are likely to be affected around a wealth tax.
What does the IMF think?
With almost impeccable timing, the IMF, the International Monetary Fund, were in town and it suggested that maybe it was time for a capital gains tax.
The Concluding Statement of the 2023 Article IV Mission noted:
Well-designed tax reform could allow for lower corporate and personal income tax rates by broadening the tax base to other more progressive sources, such as comprehensive capital gains and land taxes, while also addressing fiscal drag and improving efficiency.
It’s not the first time the IMF has suggested changing the tax system. They did so in 2021. In fact, there’s a regular pattern of the IMF and/or the OECD coming here looking around saying, “Well, guys, the country is in good shape, generally government policy is pretty sound, but you need to do something about capital gains taxes.” Regardless of whichever party is in power the Government’s reaction is quite funny. They like the bit about everything being under control. But at the mention of capital gains tax, they all throw up their hands in horror. And yet, as we know all around the world, capital gains taxes are a common feature of tax policy.
The Crypto-Asset Reporting Framework, the latest expansion of the Common Reporting Standards
Now, the Greens wealth tax proposal will probably be music to the ears of the French economist Thomas Piketty, who has proposed a global wealth tax, as one of the core points of his monumental work, Capital in the 21st Century. And at the time of publication in 2014, the opportunities for that global wealth tax to ever eventuate were probably just about zero or maybe marginally above zero.
But since then, we’ve had the introduction of the Common Reporting Standards which I think is actually revolutionising the tax world quietly because an enormous amount of information sharing is now happening on. We know from what’s been reported under the Automatic Exchange of Information that there’s something like €11 trillion held in offshore bank accounts. The Americans have got their FATCA, the Foreign Account Tax Compliance Act, and as a result of that, they know that American citizens have got maybe US$4 trillion held offshore.
Now, the latest part of the Common Reporting Standards is extending the framework to crypto-assets and I talked about this last year when the proposals first came out. Those proposals have now been finalised and the Crypto-Asset Reporting Framework is now in place. There have also been some amendments to the Common Reporting Standards. I’m going to cover all these changes in a separate podcast because I think they’re worth looking at in a bit more detail.
The tightening noose of information exchange
But the key trend in international taxation that’s going on, which I think is going to have a long-term impact around the world, and particularly for tax havens, is this growing interconnectedness, the sharing of information that goes on between tax authorities through mechanisms such as the Common Reporting Standards. I asked Inland Revenue about what information they had been supplied under the CRS in relation to the numbers of taxpayers and the amounts held in overseas bank accounts. Inland Revenue turned down my Official Information Act request on the basis that much of this is obviously confidential, but also would be compromising to the principles under which the information is shared.
Now, I’m not entirely sure about that. I think the more openness we have about what is being shared, the better the likelihood of tax enforcement once people cotton on to what’s happening. They will not think “Yeah, well, I’m just going to leave it over in the UK or the US or wherever, and Inland Revenue will never find out.” My view, as I tell my clients, is they always find out and they know much, much more than you can imagine.
And outside of the CRS there appears to be a regular exchange of information about property purchases between the United States Internal Revenue Service and Inland Revenue here. So be advised, the Crypto-Asset Reporting Framework is just the latest in a building block of international information exchange.
The Auckland Budget – what about climate change?
And finally, the Auckland budget got signed off last week. I’ve been in the press disagreeing with the sale of any part of the Auckland airport shares, and I still stand by that. I think it’s a short-term fix for a long-term problem, but that’s now done and we move on.
What I did think was quite surprising as you delve into the budget is some of the numbers that come out. As I mentioned earlier, the rating base for Auckland and according to the Auckland Council’s documents is over $1 trillion.
But the thing that really surprises me, which wasn’t addressed in the budget so we’re going to have to address it next year, is the question of climate change. Towards the end of the process, the Government announced that in the wake of Cyclone Gabrielle 700 homes around the country are too risky to rebuild. The Government and councils will offer a buyout option to those property owners.
400 of those are in the Auckland region and apparently it doesn’t also take into account what is going to have to happen out at Muriwai because of the slips and the dangerous cliffs over there. As Deputy Mayor Desley Simpson pointed out, “If you say it’s 400 [Auckland homes] times $1.2 million, give-or-take just like the average house price, you’re talking half a billion dollars.”
The question arises how is that split between Auckland ratepayers and the rest of the country? Yet there was nothing in the Auckland budget about this, and that’s just this year’s damage. What happens if we get another Cyclone Gabrielle, next year?
We’ve got an interesting scenario developing where we’re talking about reducing emissions and we’ve got a distant horizon 2030 or whatever farmers and other parties want to extend it to. But in the meantime, we are picking up the bill now for increased damage and we don’t seem to be thinking in terms of how does that affect our taxes and rates? And this is going to be an ongoing issue. So, the question of paying for that, whether it’s a wealth tax, capital gains tax, whatever, is going to become ever more present, in my view.
That’s all for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.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 to rā. Have a great day.
A look ahead at the expected big tax themes in the coming year.
The arguments for taxing property, a wealth tax, what might Joe Biden’s presidency mean for international environmental taxation and how will Inland Revenue respond.
Welcome to 2021. So what lies ahead in the tax world this year? Well, firstly, housing will remain an issue and I expect we will see steady calls for radical action on this front, including a demand for a capital gains tax. I actually think it’s gone beyond the point at which a CGT would have an impact.
In terms of tax measures, as I’ve said previously, restricting interest deductions including applying the existing thin capitalisation rules to investment properties might help to even the playing field between investors and first-time buyers, a group to which the Government appears to be paying particular attention.
Susan St. John has called for the Risk-Free Rate of Return (which is similar to the Foreign Investment Fund fair dividend rate rules) to apply to investment property. And her suggestion was recently echoed by Professor Craig Elliffe, who was a member of the Tax Working Group.
The Tax Working Group looked seriously at the question of applying a Risk-Free Rate of Return to investment property. It estimated the revenue from applying a rate of 3.5% would be approximately $1 billion in the first year and was expected to rise to $2 billion per annum within 10 years. The expectation would be that such a move would,
“tax a currently undertaxed asset class more adequately and act as a curb to burgeoning house prices. Westpac economist, Dominick Stephens calculates that a 10 per cent CGT would reduce house prices by nearly 11 per cent. It is unclear what effect the RFRM, but it should stem the increase. But it’s not clear what effect a Risk Free Rate of Return method would have, but it should stem the increase.”
Now, tied to the question of housing is the issue of wealth inequality, and I expect we will continue to see calls for a wealth tax. Over in the UK just before Christmas, their Wealth Tax Commission released a report recommending a one off wealth tax for the UK, which it estimated could raise about £260 billion over five years. What was particularly interesting about this commission is the depth of the research into the topic.
Quite apart from the final report, the Commission produced a series of other working papers on the design and operation of wealth taxes around the world. And these, in the commission’s own words,
“represents the largest repository of evidence on wealth taxes globally. To date, it comprises half a million words across more than 30 papers covering all aspects of wealth, tax design and both in principle and practice.”
Just to put that in context, I estimate the Tax Working Group’s consideration of wealth taxes amounted to perhaps 10,000 words in total. So we are looking at a very significant amount of research.
Now, one other thing to keep in mind about the British Wealth Tax Commission was that it called for a wealth tax, even though the United Kingdom has a capital gains tax and an inheritance tax. Instead, it recommended a thorough review of those existing taxes. The Commission also went for a one-off tax rather than an annual wealth tax, which is the common type of wealth tax currently and what the Greens propose. The Commission saw that there were quite a few practical issues around the operation and an ongoing wealth tax. These issues together with political pressure, has meant that the use of wealth taxes has declined throughout the OECD.
The Tax Working Group also concluded that an annual wealth tax would have enormous practical issues in implementation, which is why it did not recommend it.
But what the Wealth Tax Commission’s research makes clear is just how unique New Zealand’s approach to the taxation of capital is. It’s well known that New Zealand does not have a comprehensive capital gains tax, but that’s not entirely unique within the OECD. Switzerland, for one, does not have a capital gains tax.
Where New Zealand is unique, is that it does not have comprehensive taxation of capital in any form. Switzerland has a comprehensive wealth tax. In fact, the tax it raises from wealth taxes represents one per cent of GDP, which is the highest of any country with a wealth tax. Wealth tax revenue amounts to 4% of the Swiss tax take so it’s an important part of the Swiss tax system,
Wealth taxes in the OECD do not raise significant amounts of revenue and that’s one of the reasons they’ve been declining in use. The Wealth Tax Commission’s papers are well worth reading. A particularly interesting one is about the political economy of the abolition of wealth taxes in the OECD, which those who want to promote taxation changes would do well to read closely.
I think pressure will continue to mount on the Government on the taxation of wealth because of this ongoing anomalous position where we don’t tax capital on transfers by way of an inheritance tax or even a stamp duty, and not tax increases in value generally will feed into the debate around inequality.
And there’s an interesting point a client made to me on this topic. It’s been a long-standing New Zealand policy to attract high net worth individuals to come to New Zealand. Such immigrants may well qualify for a four-year tax holiday on their non-New Zealand investment income. These people being wealthier tend to have very diverse investment portfolios.
But as the client pointed out to me, it seems wrong that their investments would be taxed on their capital growth under the Foreign Investment Fund regime whereas property investors are not taxed on that growth at all. My client thought that was an anomaly that sooner or later would start to act as a disincentive for high-net-worth migrants to New Zealand. This may lead to growing political pressure to level the playing field, so to speak.
So anyway, the taxation of wealth, whether through a capital gains tax and/or a wealth tax or some other mechanism, is going to remain on the agenda.
A week before the British Wealth Tax Commission issued its report, our Government declared a climate change emergency, joining 32 other nations who have made such a declaration.
Now in my first podcast of last year, I said that the role of environmental taxes as one of the tools in the meeting our emissions targets will become ever more important. And that remains the case.
But we now have a new American president, and one of the first actions of President Biden after his inauguration was an executive order confirming the United States would re-join the 2015 Paris agreement. Now, several people have pointed out this may well act as an indirect trigger for the government to take further action on reducing emissions.
More than a few columns have pointed out that there is a discrepancy between the government’s declared intentions and the actual steps being taken to reduce emissions and meet our commitments under the Paris agreement. One estimate is that New Zealand exceeded its national share of consumption-based emissions by more than a factor of 6.5.
So this year I expect we should start to see some movement on taxing emissions more thoroughly and a place they might well start because the transport sector is the biggest source of emissions is to change the taxation of motor vehicles, maybe by following the UK’s example of applying FBT on the basis of emissions.
The government should also look at eliminating anomalies in the tax system, which effectively penalise low carbon activities such as employers paying FBT on providing free public transport. Another would be as a paper prepared for the NZTA suggested was maybe applying FBT to employer provided parking.
Biden’s inauguration could mean swifter resolution to the issue of international taxation. I think this is one where we will have to wait and see because there will be fierce lobbying in the US by the so-called GAFA – Google, Apple, Facebook and Amazon. I think progress will be made, but it will be slower than people expected.
And finally, the third trend I think we’ll see this year is Inland Revenue coming out from its rather inward-looking attitude in recent years as it completes the final stage of its controversial Business Transformation programme. With the immediate requirement to respond to the COVID pandemic now over, (please people remember to scan) Inland Revenue can get back to its more regular work.
Already before Christmas we started to see a number of new initiatives including one in relation to following up on the information Inland Revenue received under the Common Reporting Standards on the Automatic Exchange of Information.
Another is reviewing all transactions potentially within the bright-line test. You may recall that Inland Revenue fired out emails to tax agents advising “These clients appear to have made transactions within the bright-line test” which caused quite a stir. I expect we’ll see more work going into that space, which coming back to the start of the podcast ties into the taxation of property.
And finally, I think we’ll also see more activity going after the so-called cash economy. I think we’ll see Inland Revenue start following up on cash transactions, such as tradies offering a discount for cash.
So we’re going to have a busy year ahead, as always, and I will bring you the news as it develops. Next week, I’ll take a closer look at Inland Revenue, and its annual report which was released just before Christmas.
In the meantime, that’s it for today. I’m Terry Baucher and you can find my podcast on website www.baucher.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 week, Ka kite āno.
About 11 o’clock on Tuesday morning, myself and what appears to be just about every other tax agent in the country received an email from Inland Revenue with the subject line “Clients meeting the bright-line test”.
The email began: “Our records show the following clients have sold or transferred residential properties that meet the bright-line rule. This means these clients will be required to pay income tax on any profit they have made on the sale of the property.”
The email then set out the clients it believed were caught by the bright-line test rules. That is, they either sold property within two years of it being bought between 1st October 2015, and 28th March 2018 inclusive or within five years of it being bought on or after 29th March 2018.
Now readers and listeners will know that I have previously stated that we are aware that Inland Revenue has been gathering data in relation to the bright-line test. But this is the first time it’s really flexed its muscles and its capability to show exactly what it knows about what’s going on. And an insight into why Inland Revenue did that came the following Wednesday morning, when Stuff published a story under the banner headline “One in four property speculators dodging housing tax”.
Based on Inland Revenue data the story outlined that of 1701 property sales subject to bright-line test in the 2019 income year, 1285 have paid up and complied, but Inland Revenue is looking at the other 416 taxpayers who appear not to have complied with the law. It’s also looking at a further 3,758 sales for that year, where the bright-line test might apply.
This email initiative, as you might imagine, caused quite a bit of a stir amongst the tax agent community, and we know that all accountants from small companies like ourselves to major Big Four firms received these letters for their clients. Although the emails set out the client Inland Revenue believed was caught by the rules, they weren’t any more specific than that.
This upset a few accountants because it means digging around to find out what’s going on here. It also transpires that Inland Revenue may have been a little premature in its information release. Apparently, there is a follow up email coming next week, which will actually set out the address of the property in question so that we can then more accurately work out what’s going on.
But there was a fairly lively debate about the matter on the Facebook page of the Accountants and Tax Agents Institute of New Zealand of which I’m a member. And quite a few interesting snippets emerged about who had received emails and why.
Inland Revenue’s systems appear to have picked up any change in the registration of title. So that would include obviously sales where the title to the property passed to a new owner. But it also appears to have included changes in trustees because contrary to what a common misconception, trusts don’t actually exist in law although they have a separate existence for tax purposes. But in law, the property is held by the trustees. So if you have individual trustees holding property and one retires, there has to be a change of registration on the title. And Inland Revenue systems have picked up a few of these and issued a “Please explain.” Overall, though, the majority of tax agents were reasonably happy that this was the sort of initiative that Inland Revenue should be doing.
I’ve said before that Inland Revenue has access to a lot of data but doesn’t really make people aware of just what it knows. And these bright-line test emails are an example of it using the information it holds and making people aware of their obligations. One or two accountants noted it was interesting to see a sale by that client because they never mentioned it to us. There was one particular case, I recall, where the client went ahead and did something which they thought would be outside of the bright-line test, but in fact the transaction was caught. He was most crestfallen when he eventually spoke to me about the matter and I explained how the rules operated.
So this email initiative is the sort of thing that we can expect to see Inland Revenue doing more of and we can expect it to be fine tuning how it does these information releases. Yes, in some cases, such as those where there’s just merely been a change of trustee, Inland Revenue has jumped the gun. Perhaps a little bit more thought around whether that particular transaction was caught would have saved some headaches and frantic calls between clients and accountants on the matter.
But when you consider the heat in the housing market and concerns everywhere amongst those locked out of the housing market and the desire for the government to raise revenue to fill the hole blown in its balance sheet by the Covid-19, it’s not surprising Inland Revenue will be taking this initiative. It reminds people, “Hey, these are the rules. We think you’re caught. If not, please explain”. So, in summary, I think we’ll see more of these initiatives further down the track
By the way, as a PR exercise, it does no harm. Firstly, it tells the new minister that it’s on top of things and secondly, reminds those who think that Inland Revenue is big and dumb, that in fact, it has got access to a lot of information. And to borrow a line from Liam Neeson, it will find you and will, if not kill you, certainly tax you.
Well, on Tuesday, Sharon Thompson, Deputy Commissioner for Community Compliance Services, published a piece responding to our podcast.
And in particular, she addressed our suggestion the transformation hasn’t been successful because cost savings haven’t been reinvested into audit and investigation work. This was, “a narrow view of how Inland Revenue ensures tax revenue in New Zealand is as close as possible to what is required under our laws”. And our view that Inland Revenue’s current approach was incorrect is not supported by international research.
I think the phrase is “Shots fired!”, but it’s certainly intriguing to hear the Deputy Commissioner’s response. One of the points she made in responding to the specific questions we raised about the level of spending on investigations and debt management, was “Our new system has dramatically increased and improved the data we have access to. And we can watch, often in real time, as taxpayers file returns. So, if they’re getting it wrong, accidentally or deliberately, we can see and intervene, reducing the need for post-return audit and investigation.”
That is something I’ve heard from other Inland Revenue staff. If you file a tax return through the Inland Revenue portal, the system tracks the keystrokes. And in one example given to me last year by an Inland Revenue officer, if there is a suspiciously large number of adjustments being made to get the just right amount, they will look into it.
Sharon goes on to comment that every return that can generate a refund is checked automatically and amended returns are checked and screened. For example, between 1st July 2019 and 30th June 2020, Inland Revenue identified approximately 23,000 returns across all tax types which had errors or it believed were fraudulent with a value of just under $200 million. Now, that’s a good initiative and Andrea and I would not dispute that was a good result and also a good use of Inland Revenue resources.
However, Sharon’s article did not address the concerns that I’ve expressed previously and alluded to in the podcast with Andrea about Inland Revenue’s relationship with tax agents. Tax agents are vital to the operation of the tax system. But many other tax agents and I have reservations about how the new Business Transformation programme has integrated tax agents into its system.
The initiative I talked about a few minutes ago is something we would welcome, and we should expect to see that. Tax agents are actually Inland Revenue eyes and ears and so we do a lot of the pre-screening that Inland Revenue would otherwise have to do without us.
But we don’t always get access to Inland Revenue as easily as we should. The phone line for tax agents was abruptly turned off and then reinstated, but with limited hours, for example. So although Inland Revenue may feel that Andrea and I were unfair in some of our criticism, but equally, some of the criticism we raised still needs to be addressed.
The role of tax agents is one where tax agents have a great deal of concerns about what Inland Revenue expects and whether, in fact, it wants to work with tax agents going forward. My belief is Inland Revenue does, but it’s not communicating that very clearly to us at the moment.
I still feel that the dramatic fall in investigation hours of almost two thirds over the last five years is a matter for concern. But we will be able to see how Inland Revenue has worked through the Business Transformation process and see more of the numbers when its annual report is published shortly. It’s been delayed, apparently in part down to the Covid-19 outbreak.
Tax on wealth vs tax on work
And finally, the debate around taxation and housing and wealth taxes continues to rage all week. On Tuesday, Westpac published its Economic Overview for November, in which it made the point that future governments will be forced to either reduce spending or increase taxes because of the fiscal pressures that are starting to build over superannuation and health care.
“The required adjustments to our fiscal position can’t be delayed forever. Sooner or later, some form of consolidation will be necessary, though the precise form this takes will depend on which party is leading the government at the time. Our pick is that a future government will introduce some form of tax on assets such as a land tax, capital gains tax or a wealth tax. Societal concern about increasing wealth and inequality is only going to intensify, eventually creating a large constituency for such a tax. And tax experts agree that broadening the tax base would enhance economic efficiency.”
Later that afternoon, I spoke to Wallace Chapman on Radio New Zealand’s The Panel about this report and the ins and outs of a wealth tax. And in addressing the housing crisis, I made the suggestion that maybe a 10% stamp duty might be imposed on all investors or some measure like that.
Now, last week, I mentioned a Deutsche Bank report which suggested a working from home tax which unsurprisingly got pooh poohed. But the full report is actually quite interesting and actually has one of the more dramatic report openings to any bank report I’ve seen in a long time:
“To save capitalism, we must help the young. Democratic capitalism is under threat as increasing numbers of young people view the system as rigged against them. The pandemic has only exacerbated their economic disadvantage.”
Now, that’s quite an opening for any report, let alone something from a bank, but the report goes on to talk further about some tax changes and these proposals mirror what was suggested by Westpac. Deutsche Bank suggests that, for example, there is a need to have a tax on a primary residence, which if you think about the hoo-ha we had with the idea of a proposed capital gains tax taxing everything except the primary residence last year, you can imagine just how big a fight would happen if we said actually, “We’re taxing the main home as well.”
The Report also suggested that there may need to be additional taxes on financial assets such as stocks, bonds, due to their gains from loose monetary policy. As maybe people are well aware, stock markets have actually boomed quite substantially this year. New Zealand’s stock market has been hitting record highs recently. The Deutsche Bank report, notes that in the 30 years to 2019, the S&P 500, that’s the main index in the United States, gained over 800%, two thirds more than the return seen in three decades previously. The report suggests taxing such income on a basis similar to our foreign investment fund regime, and or remove exemptions and discounts and capital gains. Picking up my Stamp Duty proposal, the report suggests such duties are paid by the vendor and not, as is common, the purchaser.
Now, the point that the Report makes is the reason why it wants to increase the tax on capital is so as to avoid much higher income taxes, which are often cited as an argument against hard work. This is one of the criticisms of Labour’s proposed tax rate increase to 39%. It is very narrow and hits income earners, whereas there’s a growing consensus that it’s the taxation of capital which needs to be broadened.
So this debate is going on all around the world. When banks like Westpac here and Deutsche Bank in Germany are making comments about broadening the scope of capital taxation you know a fundamental shift is happening in taxation thinking. How that will play out, we’ll have to wait and see, and I’ll bring you developments as we go.
Well, 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 get your regular podcasts. Please continue to send me your feedback and tell your friends and clients. Until next week, ka kite āno.
Late last week, I was one of the presenters at the Accountants and Tax Agents Institute of New Zealand’s Spring Mini Conference. As you’d expect, the programme was dominated by the impact of Covid-19 and its implications for accountants and tax agents. It was an excellent mini conference and there were plenty of very useful insights from the presenters and also from the audience and participants. Here are a few of the highlights which stood out for me
From what Chris Cuniffe of Tax Management New Zealand is seeing, outside of the very obviously hard hit sectors such as tourism and hospitality, business seems to be holding up well, judging by the tax take. During the first lockdown, the final tax payments for the year ended 31 March 2020 year were due on the 7th of May. Now, by that stage, Inland Revenue had made it clear that it was using new provisions to enable it to waive the application of use of money interest if tax was paid late. So Chris Cunniffe thought there would be a huge take-up of that opportunity.
But in fact, what they saw was about $2.8 billion of provisional tax paid on the due date through the tax pools. According to Inland Revenue statistics, it has about $163 million of tax that would have been payable on the 7th of May under instalment. That is, the person contacted Inland Revenue saying “Hey, we’re not going to make this payment, can we arrange to pay it in instalments?”
That $163 million represents about five per cent of the total tax payable on the due date. And that’s actually really encouraging because it means businesses had the money, their profitability was relatively unaffected, and they were prepared to meet their liabilities. Given that the tax year end was 31st March, is what you would expect to see because the full impact of Covid-19 had not been felt by that date.
For most businesses the first instalment of provisional tax for the current year to March 2021 was due on 28th August. And there was only about a five per cent fall in the tax paid comparing what was paid on in August 2020 with what was paid in the previous year.
Remarkably, 55% of all depositors with TMNZ paid more tax this year, with only 42% paying less tax than the previous year. So that was actually really encouraging when you consider that the June quarter was when GDP fell 12.2%, the tax take holding up as well as it did seems to be an encouraging factor.
Generally speaking though, most people thought the real acid test for how businesses are tracking along will be the second instalment of provisional tax, which is due on the 15th of January. Which of course is terrible timing in the middle of a holiday period. So that will be interesting to see how well businesses have held up then.
Insolvency issues
Derek Ah Sam of insolvency practitioners Rogers Reidy thought the real wave of insolvencies hasn’t really got underway yet. But what was intriguing to hear was that despite Inland Revenue’s Business Transformation programme, it seems that a fair number of companies going into liquidation still owe several years of PAYE and GST. And this is surprising to me because Inland Revenue systems really ought to be picking this up much, much sooner. We used to see this quite a bit several years ago, but with Business Transformation, they’re supposed to be across this much sooner and taking action earlier. If that is not happening, then there’s something else going on at Inland Revenue that we don’t know which the Minister of Revenue should be perhaps asking a few questions about.
The other thing Derek noted is in relation to the question of commercial landlords who have not been required, as in Australia, to provide some form relief for their tenants. Actually, in Australia, I think there’s some provisions preventing eviction notices being issued. What Derek is seeing is that commercial landlords are taking much harder line on tenants in arrears. And they seem to be particularly targeting food outlets that have already been hit hard by Covid-19 and probably long term are not sustainable. So it appears some landlords are going to apply pressure now and get rid of them. That seems to be something that’s happening there. Again, we’ll see more as the year goes on.
Wage subsidy ethics
Tristan Dean of Hayes Knight, then ran us through the professional ethics issues to be addressed when a client takes up a wage subsidy which they’re either not entitled to or don’t apply it as prescribed. That was highly relevant given the issue popped up in the second leaders debate on Wednesday night. And it provoked an interesting discussion around that, which no doubt won’t be the last time we hear about that.
Home office safe haven
And finally, from the floor when we were discussing the question of home office allowances, the overwhelming reaction was that Inland Revenue safe haven of $15 per week was well short of the mark, with most people suggesting somewhere between $40 and $50 per week being much more realistic representation of the costs involved using the formulas available to people under the Income Tax Act.
That’s something that I’ve seen pop up in commentary or from some of the comments to articles when I’ve discussed this question. The present determination Inland Revenue issued was a temporary one. Maybe when a permanent one comes out we can get an increase of the available amount to say something closer to that $40 mark.
New pressure on crypto tax
Moving on, a couple of weeks back, I mentioned that Inland Revenue has issued up updated guidance on the taxation of cryptoassets. It now seems that it’s decided to apply much more pressure on this industry and investors, because this week it emerged that it has been asking companies that deal with cryptoassets to hand over customer details.
Now, as people are probably quite aware, the cryptocurrency and cryptoassets world is quite libertarian in its philosophy. So this probably came as a huge shock to investors and the companies themselves – that Inland Revenue could not only demand the information, but there was nothing they could do to stop Inland Revenue’s action.
A couple of years back the information gathering powers of Inland Revenue contained in the Tax Administration Act 1994 were increased and new sections giving them wider powers of search and entry were given to them.
Inland Revenue’s extensive powers are well known within tax and professional community. And pretty much our response is when a client asks, “Can they really do this?” is “Yes, you’re just going to take your lumps on this”. And so, the cryptoassets community is not the first to find out just how extensive Inland Revenue powers are, and they won’t be the last. And if they’re feeling very unhappy about it, they’re not alone in that.
I would think that this could work out quite profitably for Inland Revenue. If taxpayers have been thinking “Well, the web servers are offshore, we don’t really need to comply with this as all takes place in the darker reaches of the Internet and outside the reach of Inland Revenue”. You’re not. And other tax jurisdictions are also taking a close look at a cryptoassets. So you’ve been warned. It will be interesting to see what comes of this and how much revenue Inland Revenue raise as a result of their actions.
A wealth tax template
And finally, the Green Party’s wealth tax has been in the news again as we get closer to the election date. There’s been a reigniting of the whole question of the taxation of capital.
Without getting into too much detail, one of the arguments advanced against a wealth tax is that it would be complicated to implement. And undoubtedly, there are quite a lot of complexities to be addressed, most notably around valuations, but it’s not impossible. In fact, we already have a de facto wealth tax in operation. And we’ve had it since April 2007 when the revamped Foreign Investor Fund regime with the fair dividend rate was introduced.
For those who are not familiar with the Foreign Investor Fund regime it applies to overseas stocks and shares (but not bonds because they are subject to a different regime). Basically, taxpayers are assessed on the lesser of the notional gain over the tax year, together with the actual receipts from sales and dividends in that year, or the 5% fair dividend rate applied to the value of the investments at the start of the income year. For KiwiSaver funds and companies, the 5% fair dividend rate is automatically applied. They don’t have the alternative of the actual gains and losses during the year.
Now, as you might expect, I have to explain the foreign investment fund rules to overseas clients. And they’ve conceptually struggled with it, because it’s not a capital gains tax. But once it’s reframed in the idea of a flat wealth tax, they get it very quickly. And that’s basically how I explain it to overseas investors. Effectively the 5% fair dividend rate is a wealth tax. And if your tax rate is 33%, you’re talking about a 1.67% effective wealth tax.
Now, the foreign investment fund regime is easy to apply where you have publicly listed securities, but the regime has a whole set of rules that people normally don’t see, which relate to unlisted securities. So much of the work that you’d expect to see when you’re addressing a wealth tax has actually already been done and is part of the Income Tax Act.
So if you were introducing a wealth tax your starting point would be to expand the Foreign Investment Fund rules across more asset classes and tweak the fair dividend rate to whatever rate of tax you wish to levy on the assets.
In short, it’s complicated, but not quite as insurmountable as people make out. And of course, when you hear people saying, “Oh, it’s too complicated”, a cynic like myself is always wondering just how much they’re arguing that out of self-interest.
And on that bombshell, that’s it for this week. I’m Terry Baucher. And you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Hei konei ra!
Friday was the due date for the first instalment of Provisional ax for the year ending 31st March 2021, Provisional tax is going to be payable by anyone whose net tax for this year will exceed $5,000.
Now in the past, we’ve covered the ability to use tax pooling to give more flexibility about payments of tax, and that’s going to be particularly important for the current tax year, given our ongoing uncertainties arising from the COVID-19 pandemic. My recommendation to clients at this moment is to adopt a conservative approach. Look at paying the first instalment of tax due today but keep watching your progress and how your turnover is going. And if matters move into a tax loss position as a downturn comes through soon, then we will take steps to mitigate or deal with the next two instalments of Provisional tax.
But what if you already know you’ve got losses this year and it’s not likely to get much better for the current year? Say you’re a restauranteur or you’re in the tourism business. These are two sectors which are very clearly hit hard by the pandemic and the various lockdown measures.
Well, one of the measures introduced as part of the government’s response to the pandemic was the ability to carry tax losses back. Under this measure, if you have a tax loss for the 2020 or 2021 income years, you can carry those losses back one year. And the idea is that if you carried back to a profitable year this will mean you have overpaid tax in the prior year, and that tax can be released to help smooth your time through this ongoing pandemic.
And for most larger companies the tax loss carry-back regime is pretty straightforward. Carry back the loss one year, get a tax refund at 28% percent, and then you’ve got funds, which you can either use to meet other bills you may be behind on, or bring it forward and apply it against your current tax year liabilities such as GST or PAYE, depending on how dire the situation might be.
But one of the problems that’s emerged with the tax loss carry back rules affects a lot of smaller companies where their shareholder is also an employee. And under the rules that apply to these companies, these companies can pay out their profits to a shareholder-employee who is then responsible for the tax.
For example, say a company makes a profit of $100,000. Instead of paying tax at 28% it instead distributes it as a salary to a shareholder-employee and he or she is taxed on it at their relevant marginal rates. For someone on $100,000 with no other income, that roughly works out to about $24,000. So, there’s a tax benefit to shareholder-employees because of the gradual increase in tax rates for individuals.
But the problem that’s emerged wasn’t really addressed in the current legislation. What do you do if you carry a loss back for a company with a shareholder employee? The carried back loss is not much used to that particular company because they’ve already reduced their profit to nil by distributing it to the shareholder-employee.
And by the way, I note there was a Radio New Zealand report noting that about $2 billion dollars in wage subsidies has been paid to companies that do not appear to have paid any company income tax. It’s highly likely many of those companies have shareholder employees and it is the shareholder employee who has paid the tax using the mechanism I just explained where the whole or substantial amount of the company’s profit is paid out to the shareholder-employee.
So the tax loss carry back rules don’t work too well for small micro businesses that use a shareholder-employee mechanism. And it’s something we’ll need to be looked at if there is a permanent iteration of these rules, which I believe should happen.
But it’s also why the small business sector and accountants have not looked on this particular measure with a great deal of enthusiasm yet. Because of those complexities how do we deal with these tax losses that are brought back? Do you rewrite the whole position in the prior year? And then what does that do for other matters that are related to that person’s income, such as social assistance, ACC earner levies? The amount of ACC you may claim if you have an accident is dependent on your salary as a shareholder-employee.
So, there’s a lot of complicated issues to work through. But the tax loss mechanism is there. It works very well for companies which don’t have shareholder-employees and individuals trading for themselves or trusts can use the loss carryback rules in either the 2020 or 2021 income years.
Converting from short-term to long-term rental accommodation.
Moving on, Airbnbs in the tourism sector will also have been hit very hard by the pandemic and the collapse in overseas tourism and the substantial decline in domestic tourism. So what has happened is some of these Airbnbs have reversed a trend that was developing, and have moved back into providing longer term residential accommodation.
As always, there’s a tax consequence to that and for GST purposes it means that if the GST activity is stopped, then the person is required to de-register for GST. Part of the de-registration process will mean a deemed supply of the goods that were brought into the business. You’re deemed to have sold them and pay GST output tax on the way out. And if you’ve claimed a big input tax credit for, say, a whole property, moving it over to Airbnb, that means that you could have a substantial output tax payable on de-registration, as it’s done at a market value.
Now, under the GST Act, there is a provision that where someone is no longer carrying on a taxable activity they are obliged to let the Commissioner of Inland Revenue know within 21 days of their taxable activity ceasing, and then that registration must be cancelled unless there are reasonable grounds to think the taxable activity will be carried on within 12 months. So, this could apply if you think that within 12 months-time, we could be back up and running again.
What Inland Revenue has done is extended this twelve-month period to 18 months through a special COVID-19 determination which has just been issued and this will apply until 30th September 2021. So you now have 18 months, a lot more flexibility about whether you’re going to resume your Airbnb activities or drop out of the picture completely.
Just a caveat though – if you are currently using a property for residential accommodation, but you anticipate going back to making taxable supplies in Airbnb, you have to do what’s called a change in use calculation. This is basically an apportionment of the value of the property brought into the GST net over the expected time it’s being used for taxable activities. A little bit complicated, but you produce one of those calculations as part of your GST returns.
Political tax policy
Yesterday National released its small business tax policy. In terms of tax rates it has come straight out and said it does not plan on increasing taxes or introducing any new taxes.
Other than tax rates, National’s tax policy has a number of other measures. Firstly, they’re going to lift the threshold for the purchase of new capital investment from $5,000 to $150,000 per asset. That is you can take a complete deduction for an asset costing up to $150,000. Now apparently this only applies to “productive assets” so there’s a question as to what that might mean. It’s a temporary two-year change. Something similar has been done overseas.
And it’s a good idea although it is a question, of course, of what will and won’t meet the definition of ‘productive’. But you could see some fairly substantial plant and machinery being purchased and as a means of getting investment into productivity in the economy it’s a measure to be to be welcomed.
National proposes increasing the Provisional Tax threshold from its current $5,000 to $25,000. I’m not so sure about this one, because one of the reasons the threshold stayed at $2,500 for a long time was concern that if it was increased substantially taxpayers might forget they’ve got terminal tax to pay and find themselves short of funds. And obviously that risk increases the greater the threshold, so $25,000 is extremely generous.
It would also have an impact on the Government’s cash flow, by the way, because it would drop quite a lot of people out of the provisional tax requirements. So the Government’s income, so to speak, was will be reduced temporarily before these payments will then come in at terminal tax time. I think $25,000 is too generous, $10,000 is probably manageable. Still it’s a measure in the right direction.
Next, they want to raise the GST threshold from $60,000 to $75,000. Big tick for that, the GST threshold hasn’t been increased since 1 April 2009. So it’s well overdue and on an inflation basis $75,000 is about right.
Businesses will be allowed to write off an asset once its depreciated value falls below $3,000 as opposed to continuing to depreciate it until its tax value reaches zero. Really good measure here. Should be done straightaway regardless of who’s in power. Keeping a track of all these assets when they’ve fallen below that threshold is hard and causes needless complexity. So I like that a lot.
I also like this next one – change the timing of the second Provisional Tax payment for those with a 31 March balance date from 15th January to 28th February. That’s really quite sensible. It’s bizarre it’s in the middle of January when we’re all supposedly on holiday and it’s not a great time for cash flow. February makes a bit more sense.
Ensure the use of money interest rates charged by Inland Revenue more properly reflect appropriate credit rates. So right now, if you overpay your tax Inland Revenue will pay nothing. National are saying, well, we want something that’s a little bit more realistic than that. It’s not a bad move and it certainly would be popular with small businesses, but it’s rather based on an assumption that taxpayers would be using Inland Revenue as a bit of a bank. They won’t. A better option in this case would be tax pooling which takes care of a lot of those issues.
Increase the threshold to obtain a GST tax invoice from $50 to $500. A very generous upper limit there. I’m not sure I’d go as high as that, but that $50 threshold below which you don’t need to have a full GST invoice with all the required details on it has not been changed since 28th September 1993. So an increase in the threshold is welcome. I’d say $150 might be a better option.
Implement a business continuity test rather than an ownership test for carry-forward of tax losses. Moves in this space are already happening but the measure is to be welcomed.
Next and also welcome, review depreciation rates for investments in energy efficiency and safety equipment. That’s not a bad idea. And then consolidate the number of depreciation rates to reduce administration costs. That’s another big tick from me on that, because there are so many different rates and there’s options to probably get it wrong more often than right. And the level of micro detail required probably isn’t really appropriate for small businesses.
So those measures I think are mostly all welcome. And frankly, they’re sort of pretty much apolitical. Whoever is in power should be adopting almost all of those proposals.
Just a matter of time?
And finally, talking of parties’ tax policies, the Greens released as part of their tax policy, a proposal for a wealth tax to apply on net wealth over $1 million. Earlier this week, former legal practitioner, Human Rights Commissioner and retired Family Court Judge Graeme MacCormick picked up on the Green Party’s proposal when he wrote about the question of a wealth tax. He suggested a one percent levy on net assets of more than $10 million per person.
He also argued that it was time for the wealthy to step up and help out in this the crisis. He was sceptical of the idea of the trickle-down effect, that wealth trickles down and dissipates out through the country. He was of the view that basically we’ve got 30 years to show that hasn’t happened.
One of the interesting points he raised was that New Zealand not only doesn’t have a comprehensive capital gains tax, it also doesn’t have an estate tax or a gift tax nor a wealth tax. It’s highly unusual in the OECD for one jurisdiction to be not have at least one of those taxes applying on a comprehensive level. Some have capital gains tax and no wealth tax or estate tax. Others have a wealth tax, but no capital gains tax and some like the UK and the US, have capital gains taxes and estate and gift taxes.
The position varies across the OECD, but New Zealand is pretty unique in not having either a comprehensive capital gains tax, estate tax, gift duty or wealth tax.
Wealth taxes have fallen out of favour in the past few years, but they’re back on the agenda because, as I discussed with Radio New Zealand panel and Patrick Smellie of Business Desk, the pandemic and Thomas Piketty has opened the door on that.
And I was very interested to see this week that former Reserve Bank governor Dr Alan Bollard said in his presentation to the New Zealand CFO summit that, like it or not, given the scale of the borrowing the Government has had to engage in, capital gains tax may be an unpalatable option for governments to consider as they want to pay down the debt.
So this matter of capital taxation hasn’t gone away. We’ll hear more from other politicians no doubt, Labour and New Zealand First have still to release their tax policies. But we’ve still got another seven weeks to go to the election so there’s plenty of time for discussion on that.
Well, 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.
