• What might a possible digital services tax look like?
  • What to do before the tax year end on 31 March 2019
  • Inland Revenue’s latest instalment of its ongoing $1.5 billion business transformation.


Podcast Transcript

Kia ora!

It’s Friday, the 22nd of March. Welcome to This Week in Tax!

I’m Terry Baucher. I’m 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 everyone. 

This week in tax, we’ll take a longer look at how a possible digital services tax might look; we’ll give you a heads up on what you need to do before the tax year ends on the 31st of March; and look ahead to the Inland Revenue’s latest instalment of its ongoing $1.5b business transformation program.

Events this week in New Zealand have been dominated by the terrorist atrocity in Christchurch. In the wake of that, quite a few people – myself included – took a long look at what exactly the digital companies such as Facebook; Google, owner of YouTube; Twitter; Reddit; and Instagram had actually done in reaction the atrocity.

The worst part of it was it was livestreamed. In the wake of that, pressure has gone on to those companies. Westpac, for example, is one of many, many companies that has withdrawn its advertising from social media.

Writing for The Spinoff, I suggested that another alternative would be to take out the good old-fashioned tax hammer and use a digital services tax. This is a tax that is applied to the digital revenues of one of these digital companies.

I suggested, for starters, the rate of 20 percent could be applied, retrospectively, with effect from 1:30 pm on Friday, the 15th of March, just before the attack on the Al Noor Mosque began.

Digital services taxes are actually a growing trend around the world. The UK has announced one in November. In March, just two weeks ago, France was the latest country to join India, Italy, and the UK in introducing or proposing a digital services tax or DST.

France has followed other trends by suggesting that it would be about 3 percent of the digital revenues that could be identified in that country. Inland Revenue here could identify that by simply asking, using its powers under the Tax Administration Act, to ask all companies to provide details of how much they have paid to the various digital companies over a period of time, but it’s estimated notwithstanding that Google may have about $600m of the $1b annual online advertising in New Zealand.

Everyone is rattling the sabre on this. The hesitation about implementing it is because of the ongoing Organisation of Economic Co-operation and Development’s base erosion and profit shifting plan which is designed to try and give a coherent approach to taxing the digital companies, but that is an OECD multilateral negotiation, and these things take time – like many multi-headed trade negotiations. I think that the controversial Trans-Pacific Partnership trade agreement took all of ten years to negotiate.

Even though this space is moving quite fast in tax terms, it could still be another three or four years before there’s any international agreement. The fly in the ointment is that the US is a party to that OECD.

Guess who provides large amounts of funding to congressmen in the United States Congress? The digital companies. They are not going to lie down about this, so relying on action from the OECD is unlikely to produce quick results. Hence, other jurisdictions – France being the latest – will look at digital services tax.

I suspect that, if Facebook and the rest continue to drag their heels on this, unilateral action will become the norm. In that space, New Zealand should be positioning ourselves which is something the tax working group suggested and, just last month in February, the government said that it was going to move that way ahead. It’s more of a warning shot. We haven’t seen any concrete proposals on that. We haven’t seen a discussion document. But I would say, “Watch this space.”

As I said in my piece with The Spinoff, if you want to change the behaviour of the digital services companies so that they take down vile and objectionable material as quickly and as soon as possible, then you hit them in their pockets. A hefty digital services tax concentrates their minds wonderfully.

Moving on, the end of the New Zealand tax year for most people is just a few days away. Here are a few tips for getting yourself organised beforehand. Critically, many of these are pretty routine such as, if you’ve got stock, write it down to a fair market value now; otherwise, you’re going to be taxed on the value of the stock at the 31st of March. The same goes in professional services such as work-in-progress. Either bill it or write it off before the 31st of March.

Another typical thing to do is look at your fixed assets. Some people write the ones that have been scrapped which have been on the books and have not been cleared off the books or are no longer really effective. Or perhaps think about bringing forward some expenditure because you can always write off up to $500 on an asset – as long as you don’t buy too many of them at the same time.

This year in particular, for residential rental property owners, we are about to see the introduction of loss ring-fencing from the 1st of April. Now, to be quite frank, the legislation is to be a bit of a dog’s breakfast at this stage, but it is supposed to come into effect from the 1st of April. From that date onwards, losses incurred by residential property owners will not be available for offset against other income.

The thing to do before the 31st of March is to maximise your deductions so that you can utilise any available loss offsets this year. A particular point people should look at would be repairs and maintenance. Don’t put off repairs and maintenance until next week or two weeks’ time. Get the deduction now. Get it done now. Not only that, you’ll also earn the gratitude of your tenants.

Other things to think about as well that are very important before the 31st of March is for directors in companies to check that their shareholder current account or directors current account is not overdrawn. Otherwise, you are going to attract an interest charge of 5.9 percent from the IRD.

Finally, look to file your tax return before the 31st of March because, if you don’t, you give the IRD of a year in which to look back at your affairs if you’ve made any errors.

Looking ahead, Inland Revenue is about to release – in mid to late April – its next part of its business transformation program. This is a $1.5b overhaul of its computer system and of how Inland Revenue operates.

A computer system called First which it has been using was introduced in the early 1990s and has somehow managed to clunk along for 25 years. It’s been long overdue for replacement. This is probably five years late based on what I’ve seen.

But, anyway, Inland Revenue is moving on this and it’s now about to make the biggest step forward yet with what is called Release 3 which affects all individuals on “pay as you earn”. This is the one where the Inland Revenue have been advertising that people will be starting to get automatic refunds or an automatic square-up at the end of the year. It’s a big initiative.

What’s going to happen is that Inland Revenue will shut down on the afternoon of Thursday, the 18th of April, the day before Good Friday. It will reopen on the morning after ANZAC Day, Friday, the 26th of April. During that time, it will overhaul and transfer across the millions of records it has, run some live tests, finish some final live tests of its program, and then open for business on the 26th of April.

From that point onwards, people who are on “pay as you earn” will be automatically sent a square-up at the end of the year, and this will involve most people. More than one million people will get refunds, but about another 150,000 will get tax payments for the first time ever. These refunds will vary. Some may be as little as $10.00. Others could be quite significant because of the effect of working several jobs and being overtaxed through secondary tax.

Also, it’s important in this space that secondary tax which is applied where people are working two or more jobs now affects at least 600,000 New Zealanders. The idea is that Inland Revenue, together with something called “payday filing” where employees report online any pay on the day that they pay it. Inland Revenue will use this new information and its new super computer system to accurately calculate what a person’s tax liability is basically live each year.

I actually spoke to 95bFM about that earlier today on the matter.

This is going to make a big difference for a lot of people. It should put, for a lot of people, $5.00 to $10.00 more in their back pockets, and it means that they will not need to wait for until the end of the tax year before they can get their refunds. It puts the tax refund companies out of business. Most of the 30 or so of those companies have folded their tents, while a few have adapted their business model.

I would encourage people to practice patience on this. Although it’s a huge change, don’t be expecting that you’re going to be getting your refund on the 26th of April. It won’t work as quickly as that. Inland Revenue will work through their system and it probably will take about 10 to 12 weeks before they’ve worked through the approximately two million records they expect to be doing so.

But it is a big step forward, and it will be interesting to see how it pans out. They actually expect something like 1.8 million calls to them between the end of March and the end of June – basically, over a three-month period. We shall see how they cope with that. They have taken on extra people and they’ve reconfigured their systems for this, but it’s going to put a lot of stress on the system, so I’d urge people to be patient.

We’ll be watching as tax agents because this will affect us and there’s keen interest because, if it doesn’t go well, we’ll be the first people to see it.

That’s been 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, tell your friends and clients, and have a good week!

Until next time, ka kite anō!