• more feedback on Inland Revenue’s long-term insights briefing
• an interesting Technical Decision Summary on cryptoassets

A fairly regular topic in podcasts and public domain generally, has been the tax treatment of charities. When the Government announced its tax and social policy work programme last month it included a review of the tax treatment of charities.

Last Tuesday, the Finance Minister Nicola Willis revealed more details around what was happening, explaining that there would be announcements in next year’s budget, to be delivered in May 2025.

“What essentially we’re doing is looking to see if there are any loopholes that are being exploited that would allow entities that are structured as charities to avoid tax they should otherwise pay”

More tolls on the way

Ms Willis commented it would not be right to rule out any new tax revenue streams or levies in this current Parliamentary term, adding “The truth is, I will be looking at revenue from tolls, and there could be tweaks to the charity tax regime. You can expect me to make announcements at the Budget” On the theme of toll revenue on Friday, the Government announced three new highways being built in the North Island would all be tolled. 

Sir Michael Cullen’s biggest surprise

I recall discussing the role of charities with the late Sir Michael Cullen, when he was Chair of the last Tax Working Group. When I asked him what the biggest surprise of his time on the TWG had been, he replied it was been the extent of the charitable sector and its relative importance. The Finance Minister picked up on this commenting “what we’re weighing up here is on the one hand, in reality, New Zealand Charities play a massive role in our communities and many of them fundraise, contribute significantly to their communities and they face a lower tax burden because we all appreciate that.” She then went on to add.

On the other hand, wherever you have omissions from the tax regime, there will be some who structure their affairs to limit their liability. Who might, for example, be building up funds that aren’t going to charitable purposes, that are building up their own coffers. That’s one of the issues we’re looking at. There are a number of details here. What I want to work through carefully is not punishing the good while going trying to go after the bad.

Apparently the Finance Minister specifically mentioned Best Start and Sanitarium as examples of trading entities that are structured as charities which could impacted by the changes.

What did the last Tax Working Group say?

It’s worth looking back at what the last Tax Working Group said in its section on charities. It recommended the Government periodically review the charitable sectors use of what would otherwise be tax revenue, and to verify that intended social outcomes are being achieved.

In relation to the likes of Best Start and Sanitarium, the TWG noted “the income tax exemption for charitable entities’ trading operations was perceived by some submitters to provide an unfair advantage over commercial entities trading operations”. That is a common analysis that I see.

But the Tax Working Group hit the nail on the head when it went on to say “the underlying issue is the extent to which charitable entities are accumulating surpluses rather than distributing or applying those surpluses for the benefit of their charitable activities.”

This has been a long-standing issue and a sore point for some commercial operators which has been on Inland Revenue’s radar for some time. It will be interesting to see what comes out of this review and whether in fact there are some very targeted measures restricting the ability to qualify for the charitable exemption. But I suspect what it will come down to is how exactly the funds are being applied.

How much is at stake?

Another news report estimated that perhaps up to $2 billion of profit in the charitable sector may not be subject to tax. This estimated was based on the Charity Services latest annual report which noted charities had for the year ended 30 June 2024 total income of $27.34 billion with expenditure of $25.28 billion, leaving a difference of approximately $2 billion unaccounted for. Theoretically that income could have been taxed at 28% or $560 million. Which is not to be sniffed at, given the Finance Mnister’s repeated concerns about the state of the books.  What counter-action comes out of the Inland Revenue review will be revealed in next year’s Budget.

Inland Revenue’s proposed long-term insight briefing under fire

Moving on, last week I covered Inland Revenue’s feedback and summary of submissions it received on its proposed long-term insights briefing (LTIB). Inland Revenue was proposing to explore what the structure of the tax system would be suitable for the future, and it published the submissions that it had received on the matter. This included, as I said, a rather entertaining but bold (as you might expect) submission by Sir Roger Douglas,

Subsequently Business Desk published a story on Monday under the rather excitable headline “Corporate tax group tells Inland Revenue to stay in its lane over the long-term briefing” (paywalled) .The gist of the story was that Inland Revenue was under fire from the Corporate Taxpayers Group for having suggested that it should undertake such a review without a proper mandate. According to the CTG’s submission Inland Revenue “could be viewed as suggesting this next LTIB process would be a review of the “broad structure” of the New Zealand tax system and its future suitability. That seems to require a general review of all aspects of the tax system along the lines of the 2019 (Cullen) Tax Working Group Report.”

Such reviews are often undertaken specifically at the request of a government, often after a change of government such as the 2001 MacLeod tax review, the 2010 Victoria University Wellington review and in 2019, the last Tax Working Group.

Inland Revenue’s unique role

The truth is always a little bit more nuanced than what the CTG were apparently saying. A point that hasn’t been picked up is that this actually shows one of the problems around Inland Revenue not only being the Government’s main revenue gathering agency and responsible for the administration of the tax system, but it also is the lead policy advisor on tax. Treasury has a tax policy group, but it’s significantly smaller in scale. This is unusual by global standards because typically tax policy sits within the equivalent of treasury.

In my view it’s unfair to be singling out Inland Revenue for undertaking a periodic review. It’s been five years since the last Tax Working Group, and a lot has happened since then. Let’s remember we’ve had a pandemic, and we’ve also got a major war going on in Ukraine. The global environment has changed dramatically since 2019, and I would actually expect government agencies like Treasury to be looking periodically at the shape of the tax system. This is a key purpose of long term insights briefings.

Treasury has its own long-term insights briefing on the fiscal position, which I’ve referred to repeatedly, which has implications for tax policy. I think the criticisms are slightly unfair, and the headline probably a bit excitable, although the Business Desk notes that Deloitte were also slightly critical of the proposal.

Corporate Taxpayers Group’s suggestions

When you actually look at the CTG’s  submission, it’s more nuanced. The CTG suggests

“a more focused approach than attempting another general tax review. The environmental scan seems to suggest that the officials’ concern with the existing tax system is its possible inflexibility.”

The CTG submissions makes the very worthwhile comment that an official exercise here should be taking a sort of lead role in educating the public, and to some extent politicians, about the issues that are ahead and the options available for change. The suggestion is the focus should be on future revenue flexibility and then a question as to how governments might wish to apply the tax system to meet redistribution objectives (distributional flexibility). Against this background:

“Officials have an important role to play in such political processes. They should provide the best possible advice and objective manner matters. What are the best economic estimated economic costs of different tax bases? How would any proposal to meet distribution objectives increase these costs? The political process can then trade off measures to meet distributional objectives with the economic costs this would incur.”

The CTG suggests Inland Revenue’s proposed long-term insight briefing should consider at what is known from New Zealand and overseas studies of the dead weight costs or tax revenue generally on a particular tax basis.

I think this is a perfectly reasonable response by the CTG. You might say well of course they would say that because they represent some of the largest taxpayers in the country. So perhaps they’ve got a bit of self-interest on the matter. But the point is there are economic costs of taxing or not taxing particular sources of income and those costs need to be considered in the scope of any stand-alone review.

An interesting tax issue involving crypto assets

Finally, this week, there was an interesting issue raised in one of Inland Revenue’s latest Technical Decision Summaries. These are anonymised issues that Inland Revenue’ Tax Counsel Office (TCO) has come across either as a result of a dispute that’s between the taxpayer and Inland Revenue, or as here involving a taxpayer who has made an application for a ruling as to the correct treatment of a transaction.

Technical Decision Summaries can provide useful guidance, but they are always highly fact specific. In this case the taxpayer was a natural person who qualified to be a transitional resident because he was looking to return to New Zealand after more than 10 years of non-residency.

The question he asked was would he be a transitional resident in relation to crypto assets held in overseas centralised exchanges as well as decentralised exchanges.

Would the sale of those crypto assets therefore be exempt under the transitional residence exempt? 

As I said, these are very highly fact specific, and the ruling that came back was he would qualify as a transitional resident so long as he met various conditions and yes, the amounts derived from the sale of crypto assets during the transitional residence exemption, which typically lasts at least 48 months, would not be deemed to have a source in New Zealand.

As part of the analysis, the technical decision summary looked at what we call the source rules in section YD 4 of the Income Tax Act 2007. Would this be income from a business wholly or partly carried on in New Zealand? Are the contracts wholly or partly performed in New Zealand, or is this disposal of property situated in New Zealand?

The TCO concluded that none of those would apply and therefore because the crypto assets being traded or sold through the offshore centralised exchanges and decentralised exchanges, any gains would qualify for the transitional residence exemption.  This is an issue I’ve seen discussed previously, although I’ve not directly advised on it, so it’s interesting to get some Inland Revenue commentary. But as I said, although Technical Decision Summaries are useful, bear in mind these are always highly fact specific, so be very careful in deciding if one might apply to your circumstances.

And on that note, 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.