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Terry Baucher looks at what will be the big tax issues in the coming decade: the IRD crackdown on student loans, tax defaulters, and is the capital gains tax really dead?

Terry Baucher looks at what will be the big tax issues in the coming decade: the IRD crackdown on student loans, tax defaulters, and is the capital gains tax really dead?

This decade is only a few weeks old, but I consider the likely major tax themes for the years ahead are already becoming very clear.  Over the holidays, the news has been dominated by the apocalyptic visions of the Australian bushfires, and our thoughts and condolences go out to everyone affected by those fires particularly the families of those who've lost their lives.

Leaving aside the politics of climate change, which seem particularly toxic in Australia, New Zealand has signed up to reduce its emissions by 2050 and last year, the Zero Carbon Act became law. And in my view, over the next decade, the role of environmental taxes as one of the tools in meeting our emissions targets will become ever more important. So that is the first big theme I think we can see emerging.

Yesterday, the French government agreed to suspend collection of its digital services taxed until the end of the year.

Now, this was done in order to avoid increased tariffs with the United States government. You may recall that last year when France introduced its digital services tax America retaliated with tariffs. Now, in return for the French suspending collection, the US has now agreed to continue participating in the OECD talks aimed at achieving a generally agreed reform of the international tax system.

Therefore, the second and fairly obvious continuing theme for the next decade will be the issue of reform of international taxation, particularly for how it affects the tech giants such as Amazon, Google and Facebook. This is something that they hope to resolve this year, but I anticipate it could take longer than that. But whatever is determined it's going to change the shape of international tax for years to come.

The third theme is wealth inequality. This has been talked about for some time. And what I think you will see coming forward is a question of how we address that. Wealth disparities have been reportedly rising over the past decade or so and various taxes are being mooted as a means of addressing that matter.

Housing affordability is one of those issues where wealth inequality plays out. And earlier this week, the annual Demographia report on housing affordability said that New Zealand’s eight major markets were completely unaffordable.

So, addressing housing affordability is one part of the equation which ties in with wealth inequality. And we'll see across the coming decade stumbling attempts to try and address the issues coming from that. That's a global trend as well.

Last week the news emerged that Inland Revenue had arrested a person at the border in relation to owing student debt. A woman had just returned to the country to visit a sick mother and she was arrested at Auckland Airport while about to fly to the United States. This is part of a law change that was made in 2014, which gave Inland Revenue the powers to arrest student loan defaulters leaving the country.

There are about 100,000 borrowers living offshore, and many of these have overdue debt. Actually, some of the numbers related to student loan debt are quite astonishing. There’s more than $16 billion dollars of total debt due and more than 700,000 currently have outstanding debt with 100,000 having overdue debt. And many of those are overseas and apparently outside the reach of Inland Revenue. So, it's not surprising. Inland Revenue has given itself powers to arrest people. It does shake the tree quite dramatically and has produced some results.

Although it's a very dramatic move the number of people that have been arrested for this has been actually quite low. It was three in 2016, one in 2017, two in both of 2018 and 2019 and one so far this year.

Now, this is a bit of an intergenerational matter because older people will take the view “Pay your debts” or “We've paid our student loans, so why shouldn't you?”. And one response will be “You didn't have student debt” and generally the issue dissolves into name-calling on both sides.

But leaving that aside, there are two things that concern me about this. Firstly, I think it's another example where the current approach to penalties and interest just doesn't work. If you're going to charge penalties and interest, you'd hope that that actually does encourage payment. But apparently it doesn't seem to do that.

The top 10 outstanding borrowers collectively owe $4.28 million dollars, at which point they're going to give up. This is what I see in our business. They just simply going to give up. It then moves from being their problem to being our collective problem, because that's now a debt that's probably irrecoverable.

Secondly, why don't we see people being arrested at the border for outstanding PAYE and GST? Time and again, I encounter situations where businesses have not paid their PAYE. In some cases, deliberately not doing so and filtering the cash away for their own purposes. Yes, Inland Revenue catches up with them eventually, and in some cases those people go to jail.

But I can't help but think why don’t we have such a draconian policy towards arresting people who owe PAYE and GST?  Particularly in the case of PAYE because that affects the livelihoods of many people. It's not just a case of a debt between and individual student loan debtor and the Government. In the case of someone who's defaulting on their PAYE and maybe also on the employer KiwiSaver contributions, their employees are missing out.

So, it seems to me that if we're going to have such a dramatically fierce tool, which admittedly, is not used extensively, why are we not applying it more often to debts where arguably the social impact is greater?

And finally, I recently raised the question about whether, in fact, capital gains tax was killed off as supposedly happened last year when the Government did not follow through on the Tax Working Group's recommendation for a general capital gains tax.

In my article, I took the view that the issue isn't going to go away, in part because it’s tied into the wealth and housing affordability issues that I mentioned earlier. Also, what we're seeing is that Inland Revenue will be applying the existing rules, which are often open to interpretation about intent, much more stringently.

And I've already come across examples where Inland Revenue is seeking to tax transactions which would have been subject to the bright line test if the bright line test had been in place at the time of those transactions.

Now Inland Revenue has been through their Property Compliance Programme, looking at this issue for almost 10 years now. But what was interesting to note about this particular set of transactions is that many of them date back to beyond what we call the time bar limit, usually for four or five years. And in fact, one of them was a 2012 transaction. So, it's nearly eight years old now.

What seems to be happening is two things. Firstly, Inland Revenue is applying its enhanced capability through its Business Transformation program to review transactions. But secondly, and this is a critical point if you do not include a source of income in your tax return, which you should have included, then the time bar rules don't apply.

Generally speaking, Inland Revenue can't go back more than four or five years after a tax return has been filed, unless there's been fraud or willful evasion. But if the income is never included in the first place, then it can go back as far as it likes. And Inland Revenue is now making use of this tool.

So what that means is that for all those people out there who may have had a quick turnaround on a property transaction, for whatever reason, you may find that even though you think that may be beyond the time limit for Inland Revenue to look at it, don't make that assumption. They have more tools in there to do so now. And they’re now very keen to apply those tools to investigate older transactions. So, I expect to see quite a few more cases involving transactions eight, ten years, maybe even older as the as the Inland Revenue decides to crack down on this whole question of property transactions.

Next week, picking up the theme of the big tax issues for the coming decade, I'll be joined by 2019 Tax Policy Charitable Trust Scholarship runner up John Lohrentz. We will be discussing his fascinating proposal for a progressive tax on bio-genomic methane emissions in the agricultural sector. We'll also be discussing the future role of environmental taxes.

This article is a transcript of the January 24, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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I believe one of the big tax issues going forward for NZ and is being achieved with minimal discussion is the shift from Central Government levied taxes on income such as PAYE to shifting responsibility and therefore cost of, among other duties, environmental monitoring and enforcement to local government who's main source of income is property based rates.
This may be part of a plan to address wealth inequality by taxing those who have versus those who don't.
If it is part of an intended plan then it should be identified as such and the ramifications discussed such as significant future rates increases or higher borrowings will become the norm as local councils attempt to balance their accounts. And do local councils have the skills required?

I'd go further than that. There's lots of eyes on Central Govt by default when it comes to inefficiencies. Who is going to monitor dozens of Councils who have shown relatively little concern for deliverable targets to make sure they aren't just underwriting institutional inflation? Given there seems to be no end to Councils finding things to spend ratepayer monies on with their current remits, we should be very suspicious of plans to give them any more power to levy and tax.

Therein lies distinct possibilities for the introduction of a land tax. Central government can just feed into the mechanics of rates collection which are already calculated on value. The higher value your property, the greater amount of rates you pay. And to ease that compensation to income tax can be offered, but subsequently removed just as the Clark Cullen government did with GST. Only a suggestion though, of course.

Terry, can you (with confidentiality taken into account and so on) tell us whether the returns in question dating back to 2012 had been completed with IR10s attached? My understanding was at one point the IR10 was the threshold for whether the return was 'complete' for the purposes of the time bar rules.

Inland Revenue are only going to go after a legitimate student loan target where there is a possibility of recovering money. I know of some who have left NZ and gone to Australia. They do not earn enough to meeting the minimum payment for being overseas, and cannot afford to pay the annual interest. They know if they go after someone who is unable to pay it would lead to bad press and questioning of their powers of arrest. Inland Revenue would usually take into account hardship in relation to other taxes (student loans are a tax).

Once overseas people have to meeting minimum payments which are $5000 per year if you owe $60,000. Of course that will have $2400 per annum in interest (4% is the current rate).

Probably not a big deal if you're working for a hedge fund, but for someone working overseas for a year at a retail job it's pretty punishing.

One more nail in the coffin of functioning democracy. Debtor's Prison.

Why should the government be able to criminalise debt? The IRD should have no more power to collect outstanding debt than any one else. It is a civil matter, not a criminal one. The IRD should be an unsecured creditor.

Do we really want NZ to be a fascist state?

Part of the inherent culture, sad to say. Remember Rodney Hide. Remember the revelation of the cartoon on display IRD HQ. A taxpayer skewered on a meat hook. Now then wasn’t that reminiscent in itself of the characteristics of a certain fascist state run by a certain mad dictator.

Himm. Gets advance on debt with no security other than promise of becoming a future tax payer. Then buggers gers off to another tax jurisdiction. Aka a net loss.

Simple. No more student loans without security. Security either parents or revoke passport untill debt is cleared. No payment from those already overseas within two years, remove citizenship. They are just bluggers on current tax payers.

The real bludgers are the tertiary education institutions that have increased fees to the limit of what the government will tolerate for lending. The students are being ripped off and end up leaving to try to find work that they can't find here because their education provider lied to them about their job prospects. Parts of the education system look like a scam, and tax payers foot the bill for it.

Exactly. Credentialism rules, and, like the marketing pitch of 'hope in a bottle' for cosmetics, it's relatively easy to manufacture courses and sell 'em with the pitch of 'hope in a Certificate/Diploma/Degree'. Doubly so now that the 'free tertiary' madness has broken out. Eric Crampton has some stern words about the effectiveness of 'free fees' - close to zero.....

dont understand the sympathy for student loan defaulters,we get to pay for their degree but in time they will claim the aussie pension and we get to pay part of that too,depending on how long they lived in NZ.

The repayment threshold in NZ is half what it is in other, better paying countries. Australia's is about $40K from memory. Not only is NZ an expensive place to live while you study, it's an expensive place to live after you've started in the workforce.

Capital gains tax raises it's ugly head again. Try this for a discussion point; a capital gains tax is on the table because successive Governments, tax advisers and economists do not want to admit, or cannot see that the 'free market' has fundamentally been a failure. That it never was 'free' as without regulation it was wide open to manipulation, and was manipulated heavily by the big players and interest groups.

Lobbyists went to the Government to say the solution to the high cost of housing was tax, but consider this - the big players invariably have ways to avoid paying tax and are often reported as structuring their affairs to achieve exactly this, while the small ones usually cannot avoid tax.

I am no expert in tax, but I wonder who the IRD are capturing in their sweep of housing transactions? I suggest that there will be individuals and companies who are trading in property, declaring everything, but doing so in such a way as to avoid paying any tax.

The same people moaning about their student loans are the ones that signed up for them. They owe them and its incomparable to a company owing PAYE or other taxes...…..that latter is more an example of NZ law being toothless to penalise people who run companies while insolvent and/or fraudulently.

Why doesn't the government encourage two things. If the student is employed in their field after qualification for a set period of time then they get some of the loan forgiven. The country wins because people will hopefully want to stay and get the carrot....and hopefully we see a lot less people moaning about how they chose their course poorly in the MSM.....

There already is a carrot, it's called interest-free. There used to be another carrot in place. Any additional payments made above and beyond the minimum would be matched by the government. This was fantastic! Incentivised me to stay in NZ when I initially had a $44k debt to repay. Unfortunately National axed this around 2013. Luckily my employer had a bonus system in place to assist with student loan repayments, so I paid my loan off in 5 years instead of 12.

All tax systems are abused, and designed to be abused; some by ignorance, most through the lack of political will to close loopholes or bring in turnover based taxation.

I like the idea of student loans being secured by parents or bonds on future employment; be it in NZ or elsewhere. I fear the horse has bolted here however.

A little bit of accountability can go a long way.