- A new tax bill causes a massive storm but what happens next?
- Also a brief run-through of what other tax measures are in the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill. (TL:DR – a lot!)
Tax ultimately is politics. And that was very clearly demonstrated this week when the Government introduced and then withdrew within 24 hours its proposals to apply GST on management services supplied to managed funds as part of the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill.
On the face of it this was a provision to address a technical issue which had developed over time where fund managers were applying different treatments to how they determined what proportion of the fees they provided were taxable supplies subject to GST and what portion represented GST exempt financial services.
The proposal determined by Inland Revenue was to standardise the approach and apply GST service and fees. This would have taken effect from the 1st of April 2026. We’re therefore talking about a measure three years in the future, but which would have netted an estimated $225 million a year in GST. That in itself probably wouldn’t have caused many issues except the Regulatory Impact Statement which accompanies the Bill, included modelling by the Financial Markets Authority which on the assumption that the increase in GST would be fully passed on to KiwiSaver fund members, KiwiSaver balances would be reduced by an estimated $103 billion by 2070.
And then the fun kicked off. There clearly was quite a bit of misunderstanding about this measure with some people thinking the Government would be charging GST on KiwiSaver balances. The Government was taken completely by surprise and the furore was such that it decided to abandon the proposal within 24 hours of announcing it, which is some form of record. It certainly made for an entertaining 24 hours in tax. You can hear more about what happened in this week’s edition of the Spinoff’s podcast When the Facts Change where Bernard Hickey and I discuss the background to the proposal and how it fits into the history of tax reform since 1984.
But it should be noted that the particular issue of an inconsistency of approach by fund managers still remains. So, what’s going to happen now? Probably Inland Revenue will have to negotiate with fund managers and come to some form of agreement over what proportion of fees it deems to be acceptable to be treated as taxable supplies. This was what happened back in 2001, but that agreement has long expired. Such an agreement is going to take some time, although maybe negotiations already started. We’ll have to wait and see how that pans out.
Ironically the GST on fund management proposal was a relatively minor part of the Bill, although it would have had the biggest single tax effect. The rest of the Bill, as its name implies, covers a whole range of matters, including the gig economy, more GST issues, cross-border workers, fringe benefit, and the bright-line test to name a few.
Addressing the Platform Economy
A number of reporting and other tax issues have arisen around economic activity facilitated by digital platforms. That is where an app connects buyers and sellers and includes accommodation services such as Airbnb and transportation services, such as the ride sharing apps, Uber and Zoomy and Ola together with other professional services provided through digital platforms.
The Bill intends to ensure Inland Revenue has better access to information about income earned by sellers using digital platforms based in New Zealand or offshore. These provisions build on proposals developed through consultation by the OECD. Inland Revenue will get greater information and it will also share that information with foreign tax authorities where it relates to non-residents.
The Bill also wants to maintain the sustainability of the GST system. Digital platforms will be required to collect GST on services provided through them in New Zealand. This will be done by extending the rules that currently apply to imported digital services and low value imported goods. These will now apply to accommodation, ride sharing and food and beverage delivery services all currently provided through digital platforms.
There is a proposed flat rate credit scheme intended to reduce the compliance costs for those accommodation hosts and drivers who are not required to register for GST because the value of the services they provide over 12 months is less than $60,000. The GST changes will come into effect from 1st April 2024 and the net impact is expected to be around $37 million per annum.
These changes reflect the growing impact of the digital economy and the moves by tax authorities to ensure they know what’s going on and close potential gaps in loss of revenue may be arising because some of this may be happening under the table. It also reinforces something we see a lot of already and which we’ll see more of, and that is information sharing with other jurisdictions as appropriate.
We’re still working through the impact of COVID-19. And one of the areas where I’ve seen quite a bit of interesting work develop is in relation to cross-border workers. In the wake of the pandemic, we’ve seen a lot of people return to New Zealand from overseas. In many cases these returnees continue to carry on working remotely for their previous employer. This pattern of working remotely has expanded greatly as a result of the pandemic, and I don’t think that’s going to change significantly. But it was also another one of the situations where tax legislation and reporting and withholding tax obligations haven’t kept up with developments.
The Bill therefore has measures to deal with cross-border workers. The PAYE, FBT and employer superannuation contribution tax rules are very strictly applied, but they are incredibly inflexible. They really don’t take into account that employees might be working in New Zealand for non-resident employers and have very different compliance circumstances to those employees of New Zealand resident employers.
The Bill’s proposals acknowledge that such people coming in and working remotely for overseas employers justify taking a different approach to help reduce compliance costs for those cross-border workers. The key amendments are to allow more flexible application of the PAYE rules in specific circumstances. For example, it might allow PAYE to be paid annually. There’s also a repeal of a little used PAYE bond provision.
Alongside those rules are changes to the non-resident contractor rules which relate to the performance of services by non-resident contractors in New Zealand. These are essentially a withholding tax which operates to try and manage the tax risk of people coming in for a short period to perform contract work on a project and then return overseas. Without these non-resident contracting rules, no tax would be deducted. These rules have been in place for a very long time. Apparently, they were first introduced in the wake of the ‘Think Big’ projects of the late seventies and early eighties. They also apply quite extensively to the film industry as well which is where I first encountered them.
The non-resident contractor rules are being tweaked to update them and manage the compliance costs for those subject to them. Again, this reflects a trend that had been developing but has accelerated in the wake of the pandemic. The changes for the PAYE and non-resident contracting rules take effect from 1st April next year.
Notwithstanding what went on with the GST on managed funds issue, there’s quite a bit of other GST matters addressed in the Bill. These include provisions to address issues in the GST apportionment and adjustment rules. These are intended to reduce the compliance costs these rules impose and supposedly better align with current taxpayer practises.
There will be a principal purpose test for goods and services acquired for $10,000 or less GST exclusive. This would enable a registered person to claim a full GST input tax deduction. The other key change is to allow GST registered persons to elect to treat certain assets that have mainly private or exempt use, such as dwellings as if they only had a private or exempt use.
That latter change addresses an issue which has popped up from time to time in is that people may have made claimed GST as part of a home office deduction. If so, then potentially when that property is sold, is it therefore not the case that some portion of the sale will be subject to GST? This was a matter which technically existed, but probably wasn’t being addressed by many taxpayers and advisors.
This issue is generally covered by the GST apportionment and adjustment rules which are very complex and have high compliance costs. Under these rules if you have claimed an input tax deduction based on the estimated use business use of an asset, you are meant to track the business use of the asset. Where the actual use is different from the estimated business use, then you calculate and return an adjustment at the end of the tax year.
This is quite an involved process, and this measure is intended to try and simplify the matter. It’s a sensible change, in my view, which reflects the fact that although GST is a very broad-based tax, you can’t actually really describe it as a simple tax in its operation. There are all these issues around its margins regarding what represents business use, what proportions become taxable and therefore subject to GST, etc. And as we saw in relation to the GST and fund management services, the sums involved can be quite large actually. These proposed changes to try and simplify matters and will take effect from 1st April 2023.
I frequently discuss tax and environmental issues and I’m therefore pleased to see a proposal in the Bill for an exemption from fringe benefit tax (FBT) for certain public transport fares which are subsidised by an employer. This will take effect from 1st April 2023.This is a good example of tax being used as a behavioural change and comes about by looking at the bigger picture of how we address greenhouse gas emissions and what role can tax have in that. The Tax Working Group identified that the FBT treatment of parking is inconsistent and in many cases is not subject to FBT. By contrast, FBT is applied to subsidised public transport.
When you step back and take a wider environmental policy perspective about this, what’s happening is the opposite of what you really would want. The policy should be to tax parking to help reduce emissions and encourage the use of public transport. That’s what this measure is intended to do. It’s a very welcome move which is estimated to cost about $9 million a year. This would also appear to be a good example of how environmentally friendly changes can be achieved at relatively low cost.
Outside of the main policy issues we just discussed, the Bill, as is typical, contains a whole heap of provisions relating to many other issues. For example, there’s a number of changes in relation to the Bright-line test and interest limitation rules introduced last year.
Unsurprisingly, given the complexity of those rules, we are seeing a number of tweaks and clarifications about how they operate. One such example relates to when relief is available under the bright line test, when land is transferred on the death of the owner to the executor of or beneficiaries of the estate. Such a transfer is meant to be exempt, and the Bill has provisions making that clear.
There are some other provisions relating to rollover relief, that is when the bright-line test does not apply to transfers between related parties in certain circumstances. Most of those amendments will take effect the day after the Bill receives Royal Assent, which will probably be in late March next year. But some pleasingly have a retrospective effect back to when the changes to the Bright-line test and the interest limitation rule were announced on 27th March 2021. I fully expect we’ll see more such technical changes in the future, possibly even with some Supplementary Order Papers to this particular tax bill.
Another provision deals with a potential issue with the foreign trust regime and the exemption for foreign trusts whereby income from a non-New Zealand source is not taxable in New Zealand so long as it’s not distributed to a New Zealand resident. In some instances, a trust can make use of that provision but not have to comply with the foreign trust, registration and disclosure rules. The Bill therefore has provisions addressing that issue and some other minor technical matters applying to foreign trusts.
The recently announced build to rent exemption from interest limitation is also part of this bill. According to the supporting Regulatory Impact Statement this will cost $2.1 million if applied to existing build to rent assets.
Then inevitably, as in any of these tax bills, there’s a whole heap of other little remedial matters tidying up technical issues that have arisen around student loans, financial arrangements, provisional tax look-through companies, dual resident companies and more.
Ordinarily, this type of tax bill would barely get a mention in the press, so this week’s drama was quite unexpected. Now the dust has settled, it’s worth remembering that the issue around inconsistent treatment of GST on fund management services still remains. Ultimately, the Government backdown is another example of how short-term politics will nearly always trump longer-term policy.
Well, 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 te wiki, have a great week!