Three stories from the week in tax
- Why small businesses need a tax advocate
- More on using cryptocurrencies to pay salaries
- Another unknown unknown the UK regulations implementing the 4th EU Anti-money laundering directive
Transcript of the podcast
This morning, I and many other tax agents got a letter from Inland Revenue. It began:
We have found some errors in the way our old system calculated late payment penalties and interest for the 2018 income year. The errors relate to a legislative change that took effect in the 2018 income year, when new rules around interest were applied under section one 20K(b)(b) of the Tax Administration Act of 1994. You do not have to take any action.
We will correct the effected amounts over the next few months. Priority will be given to updating accounts that had been overcharged late payment penalties, and or debit interest or where credited interest has been underpaid.
Clients who have met their tax obligations may have been undercharged debit interest or overpaid credit interest. They will not have to pay the additional debit interest, or repay the excess credit interest.
Clients who have not met their tax obligations will be continued to be charged debit interest and that standing balances.
A fellow tax agent immediately lamented “Sigh, really IRD? I went to battle with them on a few clients over this and lost, because mighty IRD are always right, and now turns out I was right.”
There will be a lot of exasperation about this. What it leads onto for me is the issue of the difficulties for small businesses of engaging in disputes with Inland Revenue. This is something that I was actually asked to look at for the Tax Working Group in July last year, and the suggestion that we came up with was a tax advocate for small businesses.
What was driving my arguments and that of other interested parties is that Inland Revenue plays with a stacked deck of cards. It knows that it has the full weight of its departmental resources behind it, but it doesn’t mean it’s right all the time.
In some cases, a dispute will arise between taxpayers and Inland Revenue over interpretation of the law. The capital revenue divide is an example, or cases like I just pointed out, where the tax agent knows there’s something not quite right about the calculations but hasn’t got the resources to push the fight through.
What tends to happen, and we see it continually, is clients make a business decision. Okay, we think this is deductible, but it’s going to cost you $20,000 to fight it with Inland Revenue. How much is the tax at stake? $10,000. It’s easy in that context for clients to say, “Well, what’s the point of paying $20,000 to fight over a deduction worth $10,000?” They fold their tents and walk away, and this has been going on for a long period of time.
It’s been well known within the industry and the complaints have been made repeatedly through various channels such as the various institutes. The Chartered Accountants of Australia and New Zealand (CAANZ) and the New Zealand law Society have made submissions about this particular problem.
Because to take up a dispute within Inland Revenue, you go into the formal dispute process, and that’s a fairly laborious matter that’s been in play for over 20 years now. What happens is it begins with what is called a Notice of Proposed Adjustment. Inland Revenue or yourself, will come back with a Notice of Response, and then it all goes into a bit of a limbo as arguments go backward and forward.
Eventually a dispute will get passed through to Inland Revenue’s Adjudication Unit, and then after that it gets down to the real nitty gritty with Statements of Position, and then onto the Taxation Review Authority.
It’s time-consuming and expensive, and the result has been that there has been a marked drop-off in the amount of disputes going through to courts, which I pointed out in the report that I prepared for the Tax Working Group.
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A couple of Supreme Court Justices actually, Justice Young and Justice Glazebrook, both raised this matter of what’s [causing the drop in tax cases reaching the courts].
What’s really interesting is are the Inland Revenue statistics around what disputes are going on, that is those actually entered into the formal disputes procedure I mentioned a minute ago. Over the seven years to June 2017, the average number of NOPAs issued during year was 517, which when you consider there are 4.8 million active taxpayers registered within Inland Revenue, including over 400,000 companies and 240,000 trusts seems extraordinarily low in what is a very litigious area. We fight over a lot of disputes.
The idea has been developed that small businesses in particular back away from fights with Inland Revenue, even when they are on strong grounds to do so, because they simply haven’t got the resources and so they just fold the tent and move on.
The Tax Working Group, looked at this and considered that “A taxpayer advocate could play a valuable role in the fair resolution of tax disputes.” The advocate would play several roles, including the provision advice and facilitation and mediation services, and it recommended that the Government establish a taxpayer advocate service to assist with the resolution of tax disputes.
Now when the Tax Working Group recommendations initially came out, that was not one that was picked up, but there has been some movement and pressure put on the Government on the matter. I know when I was at a presentation with the Minister of Revenue, Stuart Nash, I deliberately raised this issue. The audience greeted it with great enthusiasm, and I understand in the background officials have been working further on the proposal.
It’s interesting then to note that a few weeks back the Government released background papers, on advice given to Cabinet on Tax Working Group proposals. The very first one of the 33 odd papers released was on the taxpayer advocate issue, which I found interesting reading.
This is something that I certainly will continue to raise, and I know other organisations such as CAANZ and the Accountants and Tax Agents Institute of New Zealand will also be putting pressure on the Government to push forward with it.
I think there’s an idea here that the system in the interests of fairness, needs to try and establish a balance between the rights of the individual taxpayers to dispute what’s going on, and the power of the Inland Revenue to just simply shrug and say, “So What?”
Just finally, we understand that this issue of the faulty interest and penalties, was something that large organisations picked up. What happened is that larger organizations with the muscle to say, “No, Inland Revenue. You are wrong on this,” were able to get Inland Revenue to reconsider what was happening and make the relevant changes.
Cryptocurrencies and salaries
Moving on, since Inland Revenue released its rulings on the tax treatment of using crypto assets to pay salaries there’s been a great deal of enthusiasm about this in the crypto world. I understand this is in part probably inspired by an accidental headline in the Financial Times who had misinterpreted exactly what Inland Revenue had said, to mean that the Inland Revenue had authorised using crypto assets to pay salaries.
It hadn’t done that. It had just mainly addressed the issue of what would be the tax position, if crypto assets were used. At the time myself, and one or two other people raised the issue of the Wages Protection Act, and whether in fact crypto assets could be used to pay salaries.
A colleague, Jason Hoseason, a tax manager at Duns Limited in Canterbury has just commented on LinkedIn,
via query services, Employment New Zealand/MBIE have responded that the Wages Protection act applies, so that payment of wages in crypto currency would not be legal, and there has been no change to that legislation.
In short, not yet in terms of the authorised use of cryptocurrency, legally, to pay salaries.
Another article this week has pointed out that it should be put in the employment agreements that you can do so. There will need to be an actual legal change to the Wages Protection Act to enable the payment of cryptocurrency salaries to be paid in cryptocurrency, but that’s not to say that there won’t be payments for employees that can be made through crypto currency.
The payment of tokens perhaps as a means of an equity type investment in a crypto company, would appear to still be possible.
Again, it’s just watch this space, but Inland Revenue deserve praise for having gone out and set out the basic principles. They’re not terribly controversial, but they’ve done it and set it down. It’s good to show a bit of forward-thinking and clarity on the matter.
Finally, another unknown unknown. An Inland Revenue media release caught my eye about a Bulgarian data breach.
Apparently, there was a data breach at the Bulgarian National Revenue Agency, and the Bulgarian National Revenue Agency has confirmed that a small number of people with New Zealand investments, who are taxpayer residents of Bulgaria, have been affected.
The data involved does not involve any financial details for the taxpayers, only their IRD numbers, date of birth and name and address details, which is fairly significant in the case for identity theft.
How does the Bulgarian National Revenue Authority have someone’s IRD number?
Well, this is part of the Organisation of Economic Cooperation and Development’s Common Reporting Standards on the Automatic Exchange Of Information. CRS or AEOI as it’s sometimes referred to. This is a huge initiative, in which vast amounts of data are shared by tax authorities all around the world.
One of the complaints around this was the question of the risk of data being lost or being hacked, as in this particular case. The Common Reporting Standards are something that people are not generally aware how much data is being shared.
There are several other similar initiatives going on in the world, and these include the EU’s anti-money laundering directives. And the one that I want to talk about here, which has got implications for New Zealanders is how Britain implemented the Fourth EU Anti Money-Laundering Directive.
It did so by introducing, the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 which took effect in June 2017..
Why they’re important for New Zealanders, is if a New Zealander is resident in the UK and receives [UK sourced] income from a New Zealand trust, the New Zealand trust will have reporting obligations.
These obligations arise every year it’s liable to pay any of the following taxes in the UK: Income Tax, Capital Gains Tax, Inheritance Tax, Stamp Duty Reserve Tax, which is on transfers of shares, and Stamp Duty Land Tax, which is on transfers of property.
The trust will then need to provide the name, date of establishment, country of residence and country of administration of the trust, and details of the trustees. It also must provide all details including IRD numbers, passport numbers for the the settlor and current beneficiaries, plus any other person with the ability to influence the trustee’s decision. This would be perhaps, for example the person who has the power to appoint and remove trustees.
The list goes on, and it’s an absolute nightmare for trustees. They also have to provide descriptions of the class of potential beneficiaries, where the trust is discretionary trust, including any wishes as to future beneficiaries by the settlor in a memorandum of guidance. Finally, [they must provide] details of the trusts worldwide assets including current market value, and, this is the kicker, details of the trust’s, legal, financial and tax advisors.
These regulations are largely unknown. When I spoke about them at the Financial Advice conference two weeks ago there was a stunned silence in the room when advisors realised that many of their clients could potentially be caught.
This is all part of the brave new world of tax we operate in, with massive information sharing going on. There are two risks here. One, as the Bulgarians have just found out, you could be hacked or two, you may have inadvertently triggered some fairly onerous disclosure obligations.
By the way, the EU’s fifth anti money-laundering regulations are due to come into force in 2020, and some cynics are saying that one of the drivers for a crash out Brexit is that certain wealthy Britons don’t want to be part of the EU at that time, because of their tax planning activities.
Now, surely not, but who knows what’s going on over there at the moment. And on that bombshell, that’s it for The Week in Tax