• Cullen Group law case against Inland Revenue
  • The Act to generate automatic tax refunds by Inland Revenue
  • Digital Services Tax affecting Google, Facebook adverts booked in New Zealand.


Podcast Transcript

Kia ora!

I’m Terry Baucher. I’m a tax specialist with over 30 years’ experience working with clients in New Zealand, Australia, the UK, and the United States.

My work used to be reasonably straightforward, but life has got more complicated as people move around the world and international tax authorities share information increasingly with each other. Governments are trying to catch up and keep ahead with the latest tax developments and tax planners.

I now work quite a bit in two fields – obviously, I work for my clients and give them the best possible tax advice; and then, also, advocating for a fairer tax system for everyone. As our strapline says: “Better tax stories for you; a better tax system for everyone.”

The big story this week in news in New Zealand tax was the high court decision in the Cullen Group which is owned ultimately by notorious businessman Eric Watson. This is an involved story.

In essence, Watson left New Zealand in 2002 and, shortly afterwards, he sold his businesses to an offshore structure situated in the Cayman Islands and took a debt back. The New Zealand company, Cullen Group, was required to pay interest on the advance to these companies situated in the Cayman Islands.

Now, under New Zealand rules, you’re required to withhold tax on interest payments made to non-residents. It’s called NRWT and the standard rate is 15 percent. But, if the payments are made to a non-associated party, the interest drops to 2 percent. You can have the 2 percent approved instead. This was what Watson and the Cullen Group were trying to achieve.

We’re not clear on the timeline about this, but the Inland Revenue at some time looked at this and said, “No, that’s wrong. It was NRWT – non-resident withholding tax – all along, and here’s a bill for $51.5m.” That obviously provoked some litigation. In the meantime, interest has been running on this.

Ultimately, he gets to the high court and the judge comes down. Mr Justice Palmer says, “Yes, this is tax avoidance. Clearly, it wasn’t within Parliamentary contemplation, so we find in favour of the Commissioner of Inland Revenue.”

Right now, Cullen Group faces a bill for $51.5m in NRWT plus about $60m of use of money interest, and that’s not the end of it because it can also trace penalties.

There are two types of shortfall penalties that could apply. One is an unacceptable tax position which was 20 percent, although it could be reduced to 10 percent of the tax due, so that could be another $10m on top of the $50m already paid. Or Inland Revenue could take a really hard-line approach to this and say, “This was an abusive tax position, so we’re going to charge you 100 percent of the tax avoided – the NRWT.” That’s another $50m.

There’s been no commentary about penalties on this. Typically, in these cases, parties will argue about it and come to some sort of agreement, but this case will run and run. Watson and the Cullen Group will almost certainly appeal this.

The problem is I don’t feel they’ve got much hope in this because this is the latest in a series of cases involving tax avoidance which Inland Revenue has won. In many of those times, a key part is that the courts have said, “Well, this wasn’t really within Parliament’s contemplation.”

One thing I think Watson and the Cullen Group might have a chance on is the timing of all this. These arrangements were first set up in 2002. We think there is some reference to maybe an audit having begun in 2004, but certainly Inland Revenue issued assessments in 2010.

The problem I have about this case is 16 years between inception and court is not exactly ideal in any system for any taxpayer to be under that amount of certainly for that period of time. Now, the other question is Inland Revenue has done this and all there are what we call time bar rules. Generally, Inland Revenue can’t open an assessment unless there’s wilful evasion or fraud more than four years after the end of the year which that return was filed.

They’ve slid around that in this case, and they do this quite frequently by saying, “Ah, yes, you never returned the income in any form whatsoever.” Well, that is a matter of debate which I thought was glossed over in the high court judgment.

Cullen Group did return the interest. They said, “Yes, we are paying interest. We are making payments to an offshore person, and we think these are subject to Approved Issuer Levy. Now, it’s been fined because it was tax avoidance, and they should have applied NRWT.

The point is, all along, they were quite open with Inland Revenue and saying, “We are making payments to an offshore party.” So, should Inland Revenue really have been able to slide around the issue at the time mark? That, I think, is the point where the assessment will be one to watch in this case.

Moving on, the next big news affects significantly more people – perhaps as many as two million people – and that is the passing of the Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill. It’s quite a mouthful.

This is the bill which puts the legislation in place which enables Inland Revenue to now, from the 1st of April, automatically issue refunds to hundreds of thousands of taxpayers. An estimated 750,000 taxpayers will benefit as a result of this measure.

The bill also introduces new measures allowing Inland Revenue to issue tailored tax codes, as they’re called, for “Pay as You Earn” which is hoped will effectively put an end to the problem of secondary tax. Secondary taxation affects about between 500,000 and 600,000 taxpayers. It means that people who have more than one job, their second, third, fourth job may be taxed at the flat rate of 33 percent when, in fact, when you look at their overall income, the tax rate that should apply is lower.

This has been the bane of a lot of people’s lives and it is the main reason why tax refund companies you may have seen – like, MyTax – were set up and they used to deal and get refunds for people in these circumstances.

As a result of this measure and this new bill coming through, from the 1st of April, the tax refund companies are basically out of business because the Inland Revenue will be able to issue everything automatically.

Now, there is a wee catch to this. The Inland Revenue is transferring to what’s called “Release 3” as part of its business transformation. From mid-April, Release 3 is the one which will enable all these automatic refunds to go through.

I’m told there might be about 1.7m people that might be affected. Also, it’s what’s called an automatic square-up.  Many people will be getting refunds; a few will be fine, for the first-time they don’t have any tax to pay.

Anyway, to get everything ready, Inland Revenue was basically going to be shutting down between the 18th of April and the 26th of April which is the Easter-Anzac period. It’s the only time they could do it, really. So, nothing is going to happen before that shutdown is completed.

Don’t think you can file and get a refund on the 1st of April when the new year starts. It’s not going to happen. I don’t expect to see many refunds coming through until May at the earliest. That is actually going to put pressure on the Inland Revenue system. They expect they’re going to get 1.8 million calls for six months from the 1st of April as people say, “Where’s my money?” We’ll see how well their systems cope with that.

Finally, this week, just a story that’s popped up in the news today, but it picks up a story that is ever-evolving. It comes back to what I said at the top of the podcast that is an international issue.

Details of online advertising were just being released – how much is being spent. It’s estimated it’s now crossed about a billion dollars in online advertising in New Zealand. Now, the lions share of this is snapped up by Google and Facebook.

This is the point where the so-called digital services tax which was mooted with the government saying it was going to consider in the same week as the tax working group report was released. That story just got completely swamped by the hullabaloo in the wake of the TWG Report.

The advertising figures here give us some idea of what perhaps could be raised by that. It appears that maybe Google has something like close to $600m of income from advertising that can be from New Zealand. If the government went ahead with the proposed 3 percent levy on that, that’s $18m it would collect.

Now, Google has changed its reporting model, and we may see more details about exactly what it’s doing when it approaches its annual accounts for December 2018 – probably in the next two or three months or so.

We don’t know exactly how much Facebook does. Apparently, Facebook has booked something like $40m with advertising agencies, but this is one to watch in this space.

The international tax arena is very dynamic. There is a lot of change happening around this question of taxation of digital services. While the Base Erosion and Profit Shifting initiative of the OECD – Organisation for Economic Co-operation and Development – is moving away in the background, it’s slow, and countries are keen to make sure they get their cut. This digital services tax is something that India has, Italy has, the European Union is looking at, Australia is looking at it, and New Zealand is just the latest in such countries to do so.

Digital giants don’t like it – surprise, surprise! Of course, they wouldn’t, but I think they will see movement in this space.

I’m Terry Baucher, and that was this week in tax.

You can find this podcast on my website – baucher.tax – or whatever you get your podcasts.

Please send me your feedback. Pass this around to your friends, and have a great week!

Until next time, ka kite anō!