16 Mar, 2020 | The Week in Tax
- What is Inland Revenue’s response so far to the COVID-19 pandemic compared with Italy, the UK and Australia?
- New Zealand trustees should be aware of potential Australian tax implications
- Year end tax planning tips
Transcript
They say a week is a long time in politics, but the pace of change over the past week as the global response to the Covid-19 pandemic ramps up has been astonishing in its rapidity. On Tuesday, as Italy went into self isolation, the Italian government announced an initial €12 billion stimulus package. This includes loans to small and medium sized companies, compensation for firms whose turnover has plunged more than 25% and apparently some form of moratorium for business and personal mortgage repayments.
On Wednesday night, the British Budget, which was actually scheduled at that time, included a further £12 billion of Coronavirus measures, including a new temporary Coronavirus business interruption loan scheme and support for taxpayers with their payments through H.M. Revenue and Customs time to pay service. In fact, HMRC has now set up a dedicated Covid-19 helpline for advice and support.
Finally, Australia announced an A$17.6 billion dollar package which will mean 6.5 million lower income Australians will receive a one off payment of A$750. This is apparently a repeat of something that happened in the wake of the Global Financial Crisis. But of great interest to a lot of business owners is the fact that small and medium sized businesses will receive up to $25,000 to cover the costs of the employee wages and salaries. And that will be paid by the Australian Taxation Office based on the tax withheld. So after you pay PAYE they’ll then give you a refund.
Here in New Zealand, the response has been more muted to date. But given the turmoil in the markets, I think we can expect to see more concrete proposals come in the next few days. Inland Revenue has given some guidance for anyone affected by the Covid-19 outbreak so far, but most of this involves basically asking Inland Revenue if you want to delay payment of tax or enter into an instalment arrangement to pay your tax. As far as I can sit, tell the use of money interest on unpaid tax of 8.35% will still apply.
As I said, we should expect to see something more concrete coming out in the next few days. But here’s just a few ideas Inland Revenue and government might want to consider. Inland Revenue should automatically allow anyone owing say under $50,000 of tax to enter into an instalment arrangement with it over say a three year period. Inland Revenue should also cancel all late payment penalties for the foreseeable future and then also lower the use of money interest rate from the current 8.35% to maybe the FBT prescribed interest rate of 5.26%. And as I said a few minutes ago, a measure similar to the Australian proposal for small and medium sized businesses would be hugely welcome.
Aussie tax grab
Speaking of Australia, I’m currently dealing with three separate cases in relation to the issue of Australian tax residents receiving distributions from New Zealand complying trusts.
There are about 600,000 Kiwis in Australia. And the very valuable temporary migrant temporary residence exemption is available to many of them. Unsurprisingly, quite a few trusts have been making distributions to beneficiaries resident in Australia. But the Australian tax treatment depends on the immigration status of the Kiwis resident in Australia.
And in one or two cases I’ve come across, the intended beneficiaries actually are married to Australian citizens because they arrived prior to 2001 when the current set of rules were largely implemented. They have returning residence visas so they don’t qualify for the temporary resident’s exemption.
What’s also become apparent is a few of these trusts in New Zealand have, as I said, beneficiaries who have been resident in Australia for some time. And in some cases people have been extremely careless, and these persons may still be trustees of a New Zealand Zealand Complying Trust – in which case under Australian law, the trust is deemed to be tax resident in Australia. So that’s a massive headache for all the trustees.
But the other power that I’ve noticed come in, in at least one example is that an Australian resident holds the power of appointment of trustees. They’re not actually a trustee, but they still held a power of appointment. For Australian tax purposes holding the power of appointment of trustees effectively gives you control and management of the trust. Under the Australian Tax Office’s view, the trust is therefore tax resident in Australia.
Now, none of that is good news. And what it means in particular where distributions of capital are to be made to an Australian tax resident, there is a very real risk that what is thought to be a capital gain and tax free for New Zealand tax purposes actually turns out to be a capital gain taxable at the full 45% rate in Australia.
So this is a real issue and what I’ve encountered is a mixture of people wanting to make distributions to Australian residents or suddenly realising that one of the Australian residents actually has retained a power of appointment over a New Zealand settled trust. And I expect we’ll see more of this.
I’ve mentioned in a previous podcast that we have a new Trusts Act coming into force in January next year. So I would suggest that as part of the review in preparation for the implementation of the Trusts Act, people should be looking at where the beneficiaries are located and what what powers, if any, they retain in relation to the trust and what distributions are being considered to be made.
The Baby Boomer generation is dying off and that is going to result in one of the greatest wealth transfers in history as that generation passes its wealth down to Gen Z, Gen X and Millennials. And that’s going to trigger a whole pile of tax implications. Particularly since as I said, there are 600,000 Kiwis in Australia, 60,000 in Britain, and many thousands more scattered all around the globe. All of them will face some very interesting tax challenges. So if you’re thinking about distributions, you should think very carefully about the tax implications of what you’re proposing.
End of tax year tips
The March 31st tax year end is fast approaching. So here’s a quick reminder of some of the matters you should be thinking about before the year end happens.
Firstly, have a look at your trading stock and either dispose of the obsolescent stock or revalue it at the current market value. Now, if you’re writing down the value of stock, you need to be able to substantiate that value in case Inland Revenue challenges you.
Similarly, if you’re a professional services firm, review work in progress and either invoice it or write it off by March 31st.
Obviously at this time you may have some debts outstanding and bad debt deductions can only be claimed if the debt is actually written off by March 31st. So now is the time you need to be ruthless with your aged debtors. Either call in the debt collectors or simply accept that it’s going to be gone and write it off.
Now if you’re thinking about paying a dividend before tax year end, just remember that there’s a 10% penalty if your imputation credit account is in debit (negative) balance. So check what the balance of your imputation credit account is. Check the tax payments have been properly recorded as well as resident withholding tax deductions. And also just be sure that if any shareholding changes have happened during the year, you have factored in the possible impact of those changes.
Remember that in order for imputation credits to be carried forward for use against future distributions, there must be 66% of the same shareholders from the date the imputation credit arose (i.e. a tax payment was made) to the date of distribution.
This is a trap that some people fall into, but you have until March 31st to fix it. If that means paying a terminal tax a little earlier or making a payment through tax pooling, get to it.
More on cheques
And finally, on the long running issue of Inland Revenue’s decision to stop accepting cheques, I have actually received replies this last week from both the Minister of Revenue and the Commissioner of Inland Revenue’s office.
Both letters basically repeated the position that it’s going to change. Both noted that Inland Revenue’s mechanism for processing cheques in house will soon become obsolete and they believe it’s not economic for it to upgrade that technology. The Commissioner’s Office commented
“We are firmly discouraging use of cheques because we are confident for most customers the alternative options will meet their needs, so tax obligations are easily met”.
I’m not so sure about how easily met they are for some clients, but that’s the view they’ve taken.
The Minister just noted that there’s been a steady decline in the use of cheques over the past four years, and only now only 5% of any payments made to Inland Revenue are made by cheque. Interestingly, the Minister also noted that after the announcement was made last September that cheques would no longer be accepted, the number of cheques received immediately dropped by between 41 and 48% compared with the same month the previous year [2018]. So obviously in Inland Revenue’s mind that justifies their move because there were probably a number of taxpayers who could have paid electronically but kept paying by cheque until they reached a position where they had to change.
I’m still not satisfied by this. This position is driven from a business perspective for the Inland Revenue and not from the fact that we are required by law to meet our tax obligations. We don’t have any alternative about that, and there’s going to be a significant group of elderly people in particular who are uncomfortable using internet payments or do not have access to those online. So, I think Inland Revenue is still sliding round that issue and shouldn’t duck it. We have to pay our taxes required by law and that’s just tough. What I resent is as a small business, we get those costs passed on to us to try and sort out. But thanks to something called anti-money laundering, it’s actually procedurally for us a little bit more complex than Inland Revenue perhaps appreciates.
Anyway, 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.
5 Apr, 2019 | The Week in Tax
Terry Baucher summarises the top 3 stories from this week in tax.
- Criticisms of TWG proposals on CGT
- Finance and Expenditure committee hear submissions about online GST and loss ringfencing
- It’s terminal tax time
Podcast Transcript
Kia ora!
It’s Friday, the 5th of April. Welcome to The Week in Tax!
I’m Terry Baucher, 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 all.
This week in tax:
- We look at more criticisms of the Tax Working Group’s proposals on capital gains tax;
- The Finance and Expenditure Committee hears submissions on a new tax bill or online GST and loss ringfencing; and
- Finally, it’s terminal tax time!
We will be hearing a lot over the next few weeks and months until the election about capital gains tax. The government will be enhancing later this month its answers to the recommendations made by the Tax Working Group.
In the meantime, there’s plenty of speculation flying about and already groups such as the Taxpayers’ Union and a new group Tax Justice Aotearoa are busy trying and putting their spin on proposals. Taxpayers’ Union is against; the Tax Justice Aotearoa is in favour.
In the meantime, a businessman, Troy Bowker – a former tax consultant and ex-colleague of mine, by the way, from my days at Ernst and Young – wrote in this week’s New Zealand Herald, taking aim at the statistics behind the Tax Working Group’s proposals. He took issue with the household income survey prepared for 2014/15 and thought that the data used was inaccurate on that and then formed a basis of criticism of trying to base the CGT on the data drawn from that.
Now, what Troy didn’t address that is also in the Tax Working Group is a pattern of what happens in capital gains tax in other jurisdictions. What other jurisdictions have found is, the wealthier the individuals involved, the bigger the proportion of income is derived from capital gains.
For example, the Tax Working Group cited Canada and America as examples. But, when Deborah Russell and I were researching Tax and Fairness – our excellent book is still available – in Chapter 5, we looked at this issue and we saw statistics from America, but also looked at Australia and the UK. The pattern was pretty much the same. The wealthier the individual, the more likely the greater proportion of income they would derive from capital gains.
For example, in Australia, in the 2013/14 Australian tax year, 1,205 taxpayers derived over Australian $4.1b in capital gains. That was 30 percent of all capital gains reported in the Australian tax returns.
For the year ended 31st December 2014 in America, in the top 0.1 percent of taxpayers reported 34 percent of all capital gains.
Finally, in the UK, in the same period, the year ended the 2014/15 year, 48 percent of all capital gains were reported by the 17.9 percent of taxpayers who earned more than £100,000 that year.
The pattern is quite clear even if some criticism could be directed at how the survey was conducted and then used by the Tax Working Group. The packing is the same around the world. The greater the wealth of the individuals concerned, the greater the percentage of income is reported that represents capital gains. This will run and run, and it basically will go backwards and forwards.
But bear in mind the old adage – “There are three kinds of lies: lies, damn lies, and statistics.”
This can be used both ways. But, statistically, the survey is relatively sound. Her 8,000 responses which I understand by statistics standards is good, and the pattern across those jurisdictions which have capital gains and are providing analysis show the same. The wealthier the individuals involved the greater the proportion of capital gains they report, and this was at the heart of the Tax and Fairness argument that the Tax Working Group brought forward in introducing a capital gains tax.
Just as an aside, the Inland Revenue doesn’t provide a lot of great detailed statistics. That was something the Tax Working Group did recommend should happen going forward. I would certainly wish to see this for two reasons – one, being a tax nerd, it’s always interesting to see what these things could do but; two, it also puts pressure or reminds taxpayers of where they should be and which sectors are paying tax and whether businesses are doing as well as they should be doing.
Inland Revenue did look at a proposal in this space about surveys and matching to income across various sectors, but that program appears to have been put on hold while Inland Revenue gets on with its business transformation programme.
This week, on Wednesday, the Finance and Expenditure Select Committee at Parliament heard submissions on the new tax bill relating to the introduction of online GST and loss ringfencing.
It’d be fair to say that neither of these measures are popular with the parties affected, but one criticism that seems to be constant looking at the submissions is how rushed the legislation is.
The legislation for this tax bill – which, if you give it its full title, is the Taxation Annual Rates for 2019/20, GST Offshore Supplier Registration, and Remedial Matters Bill – was introduced just before Christmas. It is for the loss ringfencing provisions meant to take effect from the start of the 2019/20 tax year which was on the 1st April – and, by the way, happy new tax year to everyone! – and, for the GST, 1st of October this year.
Now, as was pointed out, that’s a pretty rushed timetable. Although Inland Revenue as part of the generic tax policy process had released discussion documents on both topics, the timetable has been still pretty compressed. The discussion document for the loss ringfencing was introduced at the end of March 2018 and yet we are supposed to have that legislation enforced a year later.
But, as was pointed out, actually, for some cases, the legislation has a retrospective effect in that the so-called early balance date taxpayers’ people who start therefore are able to adjust their tax to adopt a different balance date of 31st March. Those with the 31st October 2019 balance date, their 2019 tax year started on 1st of November. They’re already within the regime, yet the legislation which puts them in the regime loss ringfencing hadn’t even been introduced to Parliament at that stage.
This is something that’s attracted a great deal of criticism in the process with just about all these submitters talking, and live submissions I have seen made this point, and the submitters speaking on Wednesday to the Select Committee by video can submit by the live stream as well. The loss ringfencing legislation is a particularly poorly drafted piece of legislation.
If you want to have an idea of just how poorly drafted it is, have a look at NSA Taxation’s submission on their website (https://www.nsatax.co.nz/wp-content/uploads/2019/02/Submission.pdf) They really climb into it. The returns introduced which have never been used in the tax act before are poorly defined. It’s not great drafting, and rushed legislation never looks good. Inevitably, what happens – and we see this still with the Look-Through Company regime – it really is often a case of enact in haste, amend at leisure.
We’ll see plenty more on this as it goes by.
One interesting comment quite a few people made this submission on the loss ringfencing was that, if given the government is considering capital gains tax proposals, are these measures really needed and should they be rushing straight through when further legislation which could have effect inside two years will be required. It’s a fair point.
The other point that was made by several submitters – myself included – is that the initial proposals in the discussion document suggested phasing this in over two to three years, and that was something that Treasury and the Ministry of Business, Innovation, and Employment suggested.
The Inland Revenue overruled that when they put this legislation forward for loss ringfencing. Why they did that? Inland Revenue, to be honest at times, is a little bit of a law unto itself, if I put it like that. They cited concerns about setting precedent, but that seems overstated in my view. I also, as a matter of fact, consider that the loss ringfencing rules address the symptoms, not the cause.
A better approach would be to look at restricting interest deductions either by expanding the interest deduction restriction rules in the mixed-use assets’ regime or through the thin capitalisation regime extending that which is something that some other submitters have made.
There is also, way back into the early 1990s, the losses from what we call specified activities which included residential property letting will limit which could be offset against other income was limited to just $10,000. That legislation could easily be reinstated if Parliament wanted to actually get something on the books which was actually workable rather than the rather messy legislation we have at present.
The Australian budget came and went this week. There were some changes. It’s a typical election year budget. The Australian election is due next month, but there’s not much to say about it at this stage because the tax cuts for mostly low-income and small businesses are proposed in the budget, but they’re, of course, really contingent on the Liberal-National Coalition getting back into government.
At this stage, it’s wait-and- see as to what exactly will come out of the Australian budget.
Finally, it’s terminal tax payment time for New Zealand taxpayers with a 31st March 2018 balance date. Terminal tax is due on the 7th of April which is effectively going to be next Monday, the 8th of April.
Just a reminder here that, if you are struggling with cashflow or you’re looking at an interest bill because you didn’t pay enough provisional tax, always look to consider making use of tax pooling companies such as Tax Management NZ (https://www.tmnz.co.nz/). We use those for our clients, and it saves thousands of thousands of dollars for our clients, so that’s something to keep in mind.
Also, today is the end of the UK income tax year which, for individuals, runs from the 6th April to the 5th April. Why? Lost in the midst of time. But I can tell you that, back in the 1990s, a suggestion was made to a precursor to HM Revenue and Customs that maybe it should become 31st March. Companies, by the way, can choose 31st March balance date.
The response was that changing the year end from 5th April to 31st March would cause confusion which is bureaucratic speak for “well, we really can’t be bothered,” but it does reflect on the current state of British politics that, if managing a change from 5th April to 31st March was deemed confusing, it’s more wonder Brexit has been a huge headache.
That’s The Week in Tax!
I’m Terry Baucher. Please pass this broadcast around to your friends.
In the meantime, have a great week!
Ka kite anō!
