So now we know the election results and the morning after the election result, I got an enquiry from a US based tax website asking what's going to happen? And in particular, how will the Labour Government be able to manage the issue around no capital gains tax and no wealth tax?
My correspondent also asked some questions about what's going to happen in the international tax space, referencing comments I made last week about the OECD’s new Pillar One and Pillar Two proposals and progress on international taxation.
Labour when campaigning, promised an increase in the top tax rate 39% on income over $180,000. So, one of the first orders of business will be a tax bill to have that in place from the start of the new tax year on 1st of April.
Labour was a little less conclusive about what it was going to do over the trust tax rate. My view would be that it must rise from 33% to 39% as a “base integrity” measure. Otherwise, companies and individuals will use the opportunity to move income which could be taxed at 39% into trusts where it will be taxed at 33%.
There's also going to be an incentive for companies to hold on to profits and reduce the amount of dividends distributed, given an unchanged company tax rate of 28%. And obviously shareholders will not be keen on paying an extra 11 percentage points if the distribution is received. This actually is a matter Inland Revenue is already concerned about, given the existing gap between the company rate of 28% and the top personal rate of 33%. And that problem is going to be exacerbated when the top tax rate rises to 39%.
Therefore, one of the big orders of business for Inland Revenue and the new government is what are they going to do about addressing that particular issue? So, watch this space. There could be some stronger use of existing anti-avoidance mechanisms or maybe a specific measure is brought in.
The US correspondent did ask if the government would be able to stick to its promise not to implement either a wealth tax or capital gains tax. I fully expect that will be the case. The Prime Minister has made her reputation on sticking to her word, and although she and Grant Robertson probably feel their hands are very much tied on the matter, that will remain the case.
It doesn't mean that there aren't other opportunities to raise revenue. The Tax Working Group considered the possibility of applying the risk-free rate of return method to residential investment property, similar in the way that the Foreign Investment Fund regime’s fair dividend rate applies to overseas investments.
I expect to see Inland Revenue get extra funding to tackle the cash economy, where estimates of the amount of tax currently being evaded each year range between $850 million and $1 billion. I've mentioned it before, and I think Inland Revenue will also be looking also at the question of fringe benefit tax on work related vehicles.
I also see that the Reserve Bank governor has started to talk about loan-to-value ratios coming into place. That is something that I raised recently in a column as possibly one of the only ways left to tackling the rising, rapidly rising house prices. A related tax measure could be the application of the thin capitalisation regime.
Last week I talked about the taxation of multinationals and it is quite possible that we might see the digital services tax move forward, if nothing more than just to keep pressure up on this matter. It would be a big step for the government to take as they do like to move in lockstep with the Australians who aren't doing anything on this. But if they're having to wait to see progress, it might be that just simply pushing it forward to have it ready to go at a moment's notice would be the option to take.
Also interesting to note in this week's developments, is the antitrust action taken by the US government against Google which references the outcome of the rather damning report recently issued by the US House of Representatives.
ex IRD staff now tax minister candidates
Finally, it will be interesting to see whether Stuart Nash continues as revenue minister or a new minister is appointed. If Stuart Nash moves on, an obvious candidate would be my co-author, Dr. Deborah Russell, who is ex Inland Revenue and has been the most recent chair of the Finance and Expenditure Committee. Interestingly, one of the new Labour MPs, Barbara Edmonds, who won the Mana electorate, is also ex Inland Revenue and was seconded from Inland Revenue to work in the Minister of Revenue's office. We should know next to by this time next week who's going to be the Minister of Revenue.
By that time, incidentally we should also see Inland Revenue’s annual report. It will be interesting to see what's being presented to the Minister.
Moving on, the Green Party’s campaigning for a wealth tax drew a lot of attention and has got pundits talking as to how much of a factor it might have been in Labour's huge win. But putting aside the wealth tax green taxation is a matter which is going to become very, very important over the next 10 years.
Now, at the moment, jurisdictions all around the world are quite rightly reluctant to move quickly on introducing new for fear of damaging a recovery from Covid-19. However, that's not to say that green taxes don't have a role going forward. And another paper released a couple of weeks ago from the OECD looks at green budgeting and tax policy tools to support a green recovery.
Now the report notes that fiscal spending during recovery with green objectives can also be economically justified because there are strong fiscal multipliers and job creation. And that is something you may recall that the Green Party campaigned on: green projects which had more job multiplier effects. In fact, I understand that was one of the reasons James Shaw was drawn to that infamous green school down in Taranaki.
The OECD also notes that carbon pricing is going to be important because it will encourage low carbon investment and consumption choices. And it regards carbon pricing as “a key tool for a successful recovery”. In particular, what it thinks is important about carbon pricing, such as our emissions trading scheme, is that it raises the cost of carbon intensive assets and therefore will steer investment and consumption towards greener, low carbon alternatives. And then ultimately, of course, carbon pricing can help restore public finances by bringing in tax revenues.
Although I think looking at the future role of green taxes, that's something further down the path. And that, by the way, was also a conclusion of the Tax Working Group. It saw that there was a future in environmental taxation, but the actual tax tools had to be developed first, and that meant it didn't see an immediate revenue gain from environmental taxation. But longer term, these would become more important.
The paper has some eye watering numbers in it. For example, it references the European Coronavirus Recovery Fund, which is worth over one trillion euros over the course of the six years between 2021 and 2027. And of that, €300 blnn is specifically earmarked for green projects.
On carbon pricing the OECD research shows that 97% of energy related carbon emissions from advanced and emerging economies, which would include New Zealand, are not taxed at a level that's compatible with decarbonisation, according to the Paris Agreement. And there are some 70% of emissions that are entirely untaxed. That's a hugely controversial matter here, obviously, because of our agricultural emissions.
So, what I think we will see coming from the new government going forward is, for example, a feebate scheme, which involved rebates for purchase of electric vehicles to replace fossil fuel vehicles. That was one of the projects that New Zealand First put the kibosh on. We'll probably see that come back up on the table very quickly. And we also expect to see some other moves on this matter.
But I expect although there will be steps in environmental taxation, these will be rather cautious to begin with for the reason I say said a few minutes ago. No government would want to increase taxation too quickly during the early stages of a recovery from the Colvard pandemic.
The IRD stumbles with its 'think big' project
And finally, Inland Revenue’s online functions have been experiencing technical issues all week. Now, this is unusual because this time of year is not usually a time of peak demand. This is between early May and late June, when it is dealing with the wash up from the previous tax year. So, what's going on at the moment? We don't know but it’s certainly not a demand related area.
Now, of course, this touches on Inland Revenue’s very controversial $1.5 billion Business Transformation project. That has been a controversial project for a number of reasons. Firstly, the sheer size of it. I know that local IT providers resented being shut out of this project. One provider at a 2014 tax conference pointed out that they had successfully built and implemented a GST system for the Bahamas in barely six months. They could not understand why Inland Revenue was spending the amount of money it was on the overall Business Transformation project.
Actually, that point also touches on something which several submitters made to the Small Business Council. And that is small businesses often felt shut out of government contracts because of the complicated procurement process involved. And one thing I'd like to see from the new government going forward is making it much, much easier for small businesses to bid for government contracts. And that also applies to local government. The amount of spending across local and central government runs to tens of billions of dollars. The risk around simpler procurement policies for, say, projects of up to, say $5 million or so are actually statistically insignificant. So that's something I'd like to see the government move on.
Inland Revenue’s outsourcing to an American company for the upgrade project didn't go down well with the local tech industry. And again, outsourcing overseas is something the government would need to be careful about moving forward.
'Transformation' gets tax community offside
Inland Revenue’s Business Transformation didn’t seem to factor in its relationship with tax agents. Although the actual transformation is largely successful from Inland Revenue’s viewpoint, it hasn't gone down well in the tax agent community. I had a client complain to me that he had recently received a call from Inland Revenue which basically said you don't need a tax agent anymore because we can help you manage your tax. His comment was, “I really felt I was being sold something”.
We've complained about that unsolicited call and we're not the only tax agency to have had clients receive such calls. But so far, our complaints don’t appear to have been heard.
Now, Inland Revenue has a very proper role to call clients and taxpayers who are behind on filing or tax payments. But what many tax agents have experienced is calls are made directly to their clients which are not related to these matters at all. And that is something that I think has gone on for too long and needs to be addressed. So that's one of the headaches the incoming Minister of Revenue, will need to pick up on.
Well, that's it for this week. I'm Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thank you for listening. And please send me your feedback and tell your friends and clients. Ka kite āno.
This article is a transcript of the October 23, 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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