The Week in Tax; COVID-19 related measures for tax losses and AirBnBs; National releases its small business tax policy; and is a capital gains tax back on the agenda?

The Week in Tax; COVID-19 related measures for tax losses and AirBnBs; National releases its small business tax policy; and is a capital gains tax back on the agenda?
The GST implications of moving from a short-term AirBnB to a long term rental

Friday was the due date for the first instalment of Provisional Tax for the year ending 31st March 2021, Provisional tax is going to be payable by anyone whose net tax for this year will exceed $5,000.

Now, in the past, we've covered the ability to use tax pooling to give more flexibility about payments of tax, and that's going to be particularly important for the current tax year, given our ongoing uncertainties arising from the COVID-19 pandemic. My recommendation to clients at this moment is to adopt a conservative approach. Look at paying the first instalment of tax due today but keep watching your progress and how your turnover is going. And if matters move into a tax loss position as a downturn comes through soon, then we will take steps to mitigate or deal with the next two instalments of Provisional Tax.

But what if you know, you've got losses already this year and it’s not likely to get much better for the current year? Say you're a restauranteur or you’re in the tourism business. These are two sectors are very clearly hit hard by the pandemic and the various lockdown measures.

Well, one of the measures introduced as part of the government's response to the pandemic was the ability to carry tax losses back. Under this measure, if you have a tax loss for the 2020 or 2021 income years, you can carry those losses back one year. And the idea is that if you carried back to a profitable year this will mean you have overpaid tax in the prior year, and that tax can be released to help smooth your time through this ongoing pandemic.

And for most larger companies the tax loss carry-back regime is pretty straightforward. Carry back the loss one year, get a tax refund at 28% percent, and then you've got funds, which you can either use to meet other bills you may be behind on, or bring it forward and apply it against your current tax year liabilities such as GST or PAYE, depending on how dire the situation might be.

But one of the problems that's emerged with the tax loss carry back rules affects a lot of smaller companies where their shareholder is also an employee. And under the rules that apply to these companies, these companies can pay out their profits to a shareholder-employee who is then responsible for the tax.

For example, say a company makes a profit of $100,000.  Instead of paying tax at 28% it instead distributes it as a salary to a shareholder-employee and he or she is taxed on it at their relevant marginal rates. For someone on $100,000 with no other income, that roughly works out to about $24,000. So, there's a tax benefit to shareholder-employees because of the gradual increase in tax rates for individuals.

But the problem that’s emerged wasn't really addressed in the current legislation. What do you do if you carry a loss back for a company with a shareholder employee? The carried back loss is not much used to that particular company because they've already reduced their profit to nil by distributing it to the shareholder-employee.

And by the way, I note there was a Radio New Zealand report noting that about $2 billion dollars in wage subsidies has been paid to companies that do not appear to have paid any company income tax. It's highly likely many of those companies have shareholder employees and it is the shareholder employee who has paid the tax using the mechanism I just explained where the whole or substantial amount of the company’s profit is paid out to the shareholder-employee.

So the tax loss carry back rules don't work too well for small micro businesses that use a shareholder-employee mechanism. And it's something we'll need to be looked at if there is a permanent iteration of these rules, which I believe should happen.

But it's also why the small business sector and accountants have not looked on this particular measure with a great deal of enthusiasm yet because of those complexities about how do we deal with these tax losses that are brought back? Do you rewrite the whole position in the prior year? And then what does that do for other matters that are related to that person’s income, such as social assistance, ACC earner levies?  The amount of ACC you may claim if you have an accident is dependent on your salary as a shareholder-employee. 

So, there’s a lot of complicated issues to work through that. But the tax loss mechanism is there. It works very well for companies which don't have shareholder-employees and individuals trading for themselves or trusts can use the loss carryback rules in either the 2020 or 2021 income years.

Converting from short-term to long-term rental accommodation

Moving on, Airbnbs in the tourism sector will also have been hit very hard by the pandemic and the collapse in overseas tourism and the substantial decline in domestic tourism. And so, what has happened is some of these Airbnbs have reversed a trend that was developing and have moved back into providing longer term residential accommodation. 

As always, there's a tax consequence to that and for GST purposes it means that if the GST activity is stopped, then the person is required to deregister for GST. Part of the de-registration process will mean a deemed supply of the goods that were brought into the business. You're deemed to have sold them and pay GST output tax on the way out. And if you've claimed a big input tax credit for, say, a whole property, moving it over to Airbnb, that means that you could have a substantial output tax payable on deregistration, as it's done at a market value.

Now, under the GST Act, there is a provision that where someone is no longer carrying on a taxable activity they are obliged to let the Commissioner of Inland Revenue know within 21 days of their taxable activity ceasing and then that registration must be cancelled unless there are reasonable grounds to think the taxable activity will be carried on within 12 months. So, this could apply if you think that within 12 months-time, we could be back up and running again.

What Inland Revenue has done is extended this twelve-month period to 18 months through a special COVID-19 determination which has just been issued and this will apply until 30th of September, 2021. So you now have 18 months, a lot more flexibility about whether you're going to resume your Airbnb activities or drop out of the picture completely.

Just a caveat, though, that if you are currently using a property for residential accommodation, but you anticipate going back to making taxable supplies in Airbnb, you have to do what's called a change in use calculation.  This is basically an apportionment of the value of the property brought into the GST net over the expected time it's being used for taxable activities. A little bit complicated, but you produce one of those calculations as part of your GST returns.

Political tax policy

Now, yesterday, National released its small business tax policy.  In terms of tax rates it has come straight out and said it does not plan on increasing taxes or introducing any new taxes.

Other than tax rates, National’s tax policy has a number of other measures. Firstly, they're going to allow lift the threshold for the purchase of new capital investment from $5,000 to $150,000 per asset. That is you can take a complete deduction for an asset costing up to $150,000. Now, this is apparently this only applies to “productive assets” so there’s a question as to what that might mean.  It’s a temporary two-year change. Now, something similar has been done overseas.

And it's a good idea although it is a question, of course, of what will and won't meet the definition of ‘productive’. But you could see some fairly substantial plant and machinery being purchased and as a means of getting investment into productivity in the economy it's a measure to be to be welcomed.

National proposes increasing the Provisional Tax threshold from its current $5,000 to $25,000. I’m not so sure about this one, because one of the reasons the threshold stayed at $2,500 for a long time was concerns that if it was increased substantially taxpayers might forget they've got terminal tax to pay and find themselves short of funds. And obviously that risk increases the greater the threshold, so $25,000 is extremely generous.

It would also have an impact on the Government's cash flow, by the way, because it would drop quite a lot of people out of the provisional tax requirements. So the Government's income, so to speak, was will be reduced temporarily before these payments will then come in at terminal tax time. I think $25,000 is too generous, $10,000 is probably manageable, but still it's a measure in the right direction.

Next, they want to raise the GST threshold from $60,000 to $75,000. Big tick for that, the GST threshold hasn't been increased since 1 April 2009. So, it's well overdue and on an inflation basis $75,000 is about right.

Businesses will be allowed to write off an asset once its depreciated value falls below $3,000 as opposed to continuing to depreciate it until its tax value reaches zero. Really good measure here. Should be done straightaway regardless of who's in power.  Keeping a track of all these assets when they've fallen below that threshold is hard and causes needless complexity. So, I like that a lot.

I also like this next one, change the timing of the second Provisional Tax payment for those with a 31 March balance date from 15th January to 28th February. That's really quite sensible. It's bizarre it’s in the middle of January when we're all supposedly on holiday and it’s not a great time for cash flow. February makes a bit more sense.

Ensure the use of money interest rates charged by Inland Revenue more properly reflect appropriate credit rates. So right now, if you overpay your tax Inland Revenue will pay nothing. National are saying, well, we want something that's a little bit more realistic than that. It’s not a bad move and it certainly would be popular with small businesses, but it's rather based on an assumption that taxpayers would be using Inland Revenue as a bit of a bank. They won’t.  A better option in this case would be tax pooling which takes care of a lot of those issues.

Increase the threshold to obtain a GST tax invoice from $50 to $500. A very generous upper limit there. I'm not sure I'd go as high as that, but that $50 threshold below which you don't need to have a full GST invoice with all the required details on it has not been changed since 28th September 1993. So, an increase in the threshold is welcome. I'd say maybe $150 might be a better option.

Implement a business continuity test rather than an ownership test for carryforward of tax losses. Moves in this space are already happening but the measure is to be welcomed.

Next and also welcome, review depreciation rates for investments in energy efficiency and safety equipment. That's not a bad idea. And then consolidate the number of depreciation rates to reduce to administration costs. That's another big tick from me on that, because there are so many different rates and there's options to probably get it wrong more often than right. And the level of micro detail required probably isn't really appropriate for small businesses.

So those measures I think are mostly all welcome. And frankly, they're sort of pretty much apolitical. Whoever is in power should be adopting almost all of those proposals.

Just a matter of time?

And finally, talking of parties’ tax policies, the Greens released as part of their tax policy, a proposal for a wealth tax to apply on net wealth over $1 million. Earlier this week, former legal practitioner, Human Rights Commissioner and retired Family Court Judge Graeme MacCormick picked up on the Green Party’s proposal when he wrote about the question of a wealth tax. He suggested a one percent levy on net assets of more than $10 million per person.

He also argued that it was time for the wealthy to step up and help out in this the crisis. He was sceptical of the idea of the trickle-down effect, that wealth trickles down and dissipates out through the country. He was of the view that basically we've got 30 years to show that hasn't happened.

One of the interesting points he raised was that New Zealand not only doesn't have a comprehensive capital gains tax, it also doesn't have an estate tax or a gift tax nor a wealth tax. It’s highly unusual in the OECD for one jurisdiction to be not have at least one of those taxes applying on a comprehensive level. Some have capital gains tax and no wealth tax or estate tax. Others have a wealth tax, but no capital gains tax and some like the UK and the US, have capital gains taxes and estate and gift taxes.

The position varies across the OECD, but New Zealand is pretty unique in not having either a comprehensive capital gains tax, estate tax, gift duty or wealth tax.

Wealth taxes have fallen out of favour in the past few years, but they're back on the agenda because, as I discussed with Radio New Zealand panel and Patrick Smellie of Business Desk, the pandemic and Thomas Piketty has opened the door on that.

And I was very interested to see that this week that former Reserve Bank governor Dr Alan Bollard said in his presentation to the New Zealand CFO summit that, like it or not, given the scale of the borrowing the Government has had to engage in, capital gains tax may be an unpalatable option for governments to consider as they want to pay down the debt.

So this matter of capital taxation hasn't gone away. We'll hear more from other politicians no doubt, Labour and New Zealand First have still to release their tax policies. But we've still got another seven weeks to go to the election so there’s plenty of time for discussion on that.

Well, that's it for this week. Thank you for listening. I'm Terry Baucher and this has been The Week in Tax. Please send me your feedback and tell your friends and clients until next week. Ka kite āno.


This article is a transcript of the August 28, 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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24 Comments

Interpretation and application of tax requirements is a matter for accountants. What ought to be taxed is matter of politics. Your politics is showing.

Haha DD,"your politics is showing" how so? I thought the article was quite neutral really.
And let's face it, this chat room is far from politically neutral, so I thought you'd be used to any partisanship by now

Enlighten us all how you would address the issues in front of us, then.

Still waiting to be enlightened...

-crickets-

If we are heading into a recession, I don't think we can tax our way out of it. Tax creates incentives or dis incentivises.
I am a farmer an asset tax I think is a really good idea as long as it is tax neutral, otherwise banks will scream as land values plunge helped along by regional council regulations.
The big problems in society come when you get extremes of inequality, that increases crime and leads to attempts to even things out, often with disastrous consequences think Russia or Cambodia to name just two.
My thoughts are that gov't revenue is going to fall, gov't will be forced to cut spending after blowing the best part of 100 billion on F all. There will be lots of very unhappy people, god save us.

Certainly agree that we can't tax our way out of the current hole. Not so sure about an asset tax though, actually as a farmer I'm surprised you're advocating for one given we are already being hammered with an asset tax called "rates". I'm not sure how you'd make an asset tax neutral unless you rebated nearly all, if not all, input costs. The govt is talking about "productive assets" but there is little or no guidance as to what those assets are. My view is - it's a trainwreck and the easiest position to take is to be "earnings neutral" going forward, even if that means buying Capital equipment, registering extra shareholders, or doing a pile more R&M if you can

you would have to stop councils taxing land and go to a poll tax. Suspect most likely option would be a half percent tax on all assets no exemptions, from there it is only upwards just like with gst. I am not expecting councils to survive in present form.

There must be limits on how much tax a government can take out of the private sector before everything goes pear shaped?

As a bare minimum a capital gains tax is needed on residential investment properties, not the one you live in. I'd even go as far as to say it should be on unrealised capital gains. If you ask why then you don't own shares, predominantly overseas shares, which are subject to unrealised capital gains tax. Most Kiwis are unaware of this as it's an easy mark and not mentioned much in the mass media. They don't see it hitting directly in their back pocket.

We can thank our Dear Leader for postponing it for another day.
A populist coward.

Or can we thank Winston Peters and National for acting like the sky would fall in and kill everyone if such a tax were introduced?

Or the members of the TWG who weren't academics or unionists trying to sloganeer their way to a conclusion, who pointed out you could achieve most of what the proposed CGT was trying to set out to achieve by just targeting property investments .e.g. stamp duties or longer brightlines.

And the hysterical shrieking of the Church of Ashley and its disciples.

nigelh - Why not tax the family home ?? If a CGT does not include the family home it really distorts Capital into the family home making house price inflation worse as happens in Australia.
' a capital gains tax is needed on residential investment properties' - it's ridiculous to single out just residential, a CGT needs to be broad based eg apply to everything including the family home, business, shares, art, cars anything that appreciates. A CGT can only be on realized gains, trying to tax unrealized gains is way to open for misinterpretation on values and would have to apply when values went negative - a can of worms !

Totally agree with you, a CGT on anything that gains profit, set the tax at 5% across the board for any investment that's makes money, after all we all buy our first home for an investment,, easily collected and not a huge cut of the profits, and the revenue from this will be much higher than just taxing residential property, I know a couple of people that have made a tax free fortune from commercial property , shares, antiques

Sorry accidentally pressed On report message, and can't take it back, sorry, all excited about someone agreeing with my thoughts

I agree with you too

Beardsley Ruml served as a director of the New York Federal Reserve Bank (1937–1947), and was its chairman from 1941 until 1946; he had this to say in 1945, that since the end of the gold standard, "Taxes for Revenue are Obsolete". The real purposes of taxes were: to "stabilize the purchasing power of the dollar", to "express public policy in the distribution of wealth and of income", "in subsidizing or in penalizing various industries and economic groups" and to "isolate and assess directly the costs of certain national benefits, such as highways and social security" https://en.wikipedia.org/wiki/Beardsley_Ruml

The only reason taxes exist is to pay government's expenses. The only way to stay in power is to spend money. Therefore increase taxes. Remember Roger Douglas and the introduction of GST? Tax spending instead of earning. What a deliberate, cynical lie. We are now taxed on earning and spending. Income tax plus GST makes most people's tax rate about 45%. Now people are pushing taxing other stuff. Don't think any other taxes are going to drop. No wonder all self employed people take every opportunity to minimise their tax burden. Please don't just keep pushing the increasing of taxes because there is an opportunity to do so.

Taxes don't fund the government and neither does borrowing. The government creates new currency when it spends, taxation and borrowing happen afterwards. NZ operates a fiat currency it is not a commodity that must be found somewhere. https://www.investopedia.com/terms/f/fiatmoney.asp

So we have banking system that creates inflation by printing money, this then increases prices and asset values in order to keep pace with this devalued currency. Thus the capital gain is no gain at all, just a reflection of the increased money supply. So CGT is just BS. The real problem is money printing. The bankers and govt are stealing from us at every turn.

We run a current account deficit that drains money from the economy so that money requires replacing and to be able to save also requires an additional money supply. Only the government can create net financial assets for our savings and banks cannot. When we repay bank loans the money is cancelled again, taxation also cancels money, that is its purpose. Some further explanation here.
https://www.economicsjunkie.com/sectoral-balances-and-private-saving/
https://gimms.org.uk/fact-sheets/sectoral-balances/

Govts create nothing. Everything they have come from our taxes.

You did not look at my links then? Where does taxpayers money come from? counterfeiting money is illegal. Money creation is a function of the state and the government is the only authority legally allowed to create it but banks are also licenced by the government to create money.