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The Week in Tax: what will the Labour Government do? A growing role for green taxes, and Inland Revenue’s IT issues

The Week in Tax: what will the Labour Government do? A growing role for green taxes, and Inland Revenue’s IT issues

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.

Other options

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.

Green taxes

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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20 Comments

How to introduce a tax change without introducing a new tax. And take some heat out of the property market

My memory grows dim ... in the final years of the Muldoon Government ... landlords with investment properties which were negatively geared deducted the interest cost of borrowing for the duration the property was leased out
On sale of the property all prior years interest deductions were clawed back as income for tax purposes

Fact ... not a flight of fancy

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The idea has merit but with interest rate so low and expected to stay lower for some time it wouldn't have too much of an effect. I've read where even the "Brightline test" is being treated as an imposition rather than a discouragement due to the gains being made. Imo the LVR (to all but FHBs) coupled with a "thin Cap. restriction" and the removal of Equity as a deposit proxy might help. If banks were compelled to recognise the inherent imbalance between FHBs and Investors it might level the field a bit. The Govt needs to be bold on this, now is their chance.

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"The Govt needs to be bold on this, now is their chance."

John Key told us he had the right ideas, and failed us in the name of remaining popular.
TOP had the right ideas but frightened and confused us.
Labour has the right ideas and if they are bold, as you and I both expect, then we will get somewhere.
But if Labour too fails us I, for one, won't vote again.

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Well all I can say is "don't hold your breath". Labour won't do any more about housing speculation now than it did last run. Neither would National if they were in. My advice - if it doesn't affect you, ignore it. If it does affect you, suck it up and work around it.
Not voting is an abdication of responsibility imro.
What we as a the voting public should insist on is defined and costed policy - something woefully missing this election from either of the larger parties. Talk about a lottery!! Ya buy your ticket and ya takes your chances - disgraceful way to decide the future of the country for the next 3 years.

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The main reason we don't get change is because the politicos know that the people reform would effect won't just 'suck it up'. They'll piss and moan about it. So why should people looking for family homes be expected to 'suck it up' just because other pampered groups won't?

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Muldoon inherited The Property Speculation Tax introduced by the preceding Kirk Labour government. My fading memory too, but think Muldoon left it in place until into his second term? So whatever it was its mechanics must have been working? Or was was it repealed because it wasn’t? Maybe this Labour lot could dust it off the shelf?

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Maybe it was reincarnated as the Brightline Test?

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The Property Speculation Tax Act 1973 is hereby repealed by the Property Speculation Tax Repeal Act 1979

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https://www.taxtechnical.ird.govt.nz/pib-reviews/archived-legislative-c…
Some of the provisions were put in the Income Tax Act 1976 and the Income tax Act 1994
Start a campaign to bring it back....
Property Speculation Tax Act 1973
Archived legislative commentary on the Property Speculation Tax Act 1973 from PIB vol 75 Nov 1973.

This commentary item was published in Public Information Bulletin Volume 75, November 1973

More information about Public Information Bulletins.

The Property Speculation Tax Act 1973 became law in August 1973. The tax relates to all "dispositions" of "land" taking place on or after 15 June 1973.

Under the Act, a profit on the "disposition" of "land" by any "person" is liable for the tax when -

There is a period of 2 years or less between "date of acquisition" and "date of disposition", and
The profit is not exempt from the tax (see below under Exemptions).
The terms in quotes are defined in the Act.

Land, of course, includes an interest in land and buildings or other improvements.

A disposition of land includes the sale of an interest in land and the sale of an option. It can also include the sale of shares in a land-owning company.

The dates of acquisition and disposition are generally the dates on which possession is given and taken.

A person includes a company, local, public or Maori authority and an unincorporated group of individuals.

Exemptions
Sales or other Dispositions After Two Years
When the land has been held for more than 2 years by the vendor, there is no liability for Property Speculation Tax.

Exemption applies to land acquired and disposed of within 2 years in the following circumstances:

Binding contract before 15 June 1973
If -

The "date of disposition" (generally the date on which possession is given and taken) is on or after 15 June 1973, BUT
A binding contract was entered into before 15 June 1973
-the transaction is exempt.

A contract is regarded as binding on a vendor even though subject to conditions, provided the conditions are outside the control of the vendor e.g. subject to the purchaser raising finance.

Sale of Own Residence
Generally exempt if -

Bought as a residence with no intention of resale at a profit, and
The reason for resale developed after purchase and was not principally to realise a profit.
For sales within the two year period the vendor should advise the tax office of the reasons prompting the sale. This can be done in the "exemption" panel on the back of the Property Speculation Tax Certificate (IR21A).

Obvious examples of acceptable reasons for an early sale would be transfer to another town, change in family circumstances, or unsatisfactory features in relation to present residence. Clearly, if a pattern of such transactions emerged, the reasons advanced would require closer scrutiny.

The same tests will in general apply to -

A person who acquired a section intending to build a residence but for some reason found it necessary to sell the section before proceeding to build.
A property bought as a residence but never occupied because of unforeseen circumstances.
Sales of Business Premises
In general terms, the tests for exemption of disposition of business premises are similar to those for the home owner disposing of his home.

Exemption on these grounds is generally not available to businesses which consist principally of -

Buying and selling land.
Developing land and buildings for sale.
Erecting buildings on land for sale.
Investing in real estate.
Sales After Substantial Improvements Effected
Renovation of Existing Buildings - Exempt if all the following conditions are met -

the value of existing improvements at date of acquisition is at least half of the purchase price, and
the cost of renovations is at least 20%* of total costs prior to disposition, and
- the owner has made the renovations as part of his business as a builder or renovator. (The Act requires him to be "wholly or principally engaged in a business of renovating buildings or in a business of erecting buildings, the activities of which include the renovating of buildings".)
Here is an example:

Purchase price (Existing improvements are worth more than half the total value, so the first test above is met) $16,000
Costs of renovations(including own labour) $ 4,000*
Total Costs $20,000
As the improvements amount to not less than 20% of the total costs such a sale within 2 years would be exempt.

*A simple test to determine the minimum amount of improvements required is to take one-quarter of the purchase price.

Building or Development - Exempt if improvements added between acquisition and disposition are at least 40%** of total costs prior to disposition.

Here is an example:

Cost of land $6,000
Improvements - subdivisional costs, or cost of building $ 4,000**
Total Costs $10,000
As the improvements amount to not less than 40% of the total costs such a sale within 2 years would be exempt.

**A simple test to determine the minimum amount of improvements required is to take two-thirds of the purchase price.

A self-employed builder or renovator may have a fair valuation of his own labour taken into account in deciding whether the 40% or 20% improvement requirement has been met, but cannot deduct the value of his own labour in arriving at his profit. The value of labour should be agreed with the tax office where necessary.

A Will or Intestacy - Exemption applies to the transfer of properties coming to the executor or administrator of an estate or to a beneficiary under a will or intestacy. These may also be disposed of by the trustee or beneficiary without being subject to the tax.

Compulsory sales to the Crown or a local authority are generally exempt.

Certificates, Returns And Payments
In respect of all dispositions of land a special certificate (Form IR21A) is required irrespective of whether or not Property Speculation Tax is payable. These forms are available from all tax offices.
This certificate should accompany the instrument which is presented to the tax office for Stamp Duty purposes.
A simpler procedure for dispositions clearly outside the 2 year period is being examined.
If there is a liability for property Speculation Tax a Return Form (IR21) should be sent to the tax office by the vendor. This return is required within 2 months from the "date of disposition" and payment must be made at the same time.
Calculation Of Profit
In general terms, the "assessable profit" will be the difference between the sale price and the cost price of the property plus and minus any intervening receipts and expenditure not taken into account for income tax purposes.

The point about income and expenditure for income tax purposes is that income, such as rents, and expenditure, such as repairs and maintenance, will be properly returnable for income tax purposes in the normal way.

Rates Of Property Speculation Tax
Where the period Between Date of Acquisition and Date of Disposition is - The Rate of Tax Applicable to Profit will be -
6 months or less 90% of assessable profit
Exceeding 6 and not exceeding 9 months 85% of assessable profit
Exceeding 9 and not exceeding 12 months 80% of assessable profit
Exceeding 12 and not exceeding 15 months 75% of assessable profit
Exceeding 15 and not exceeding 18 months 70% of assessable profit
Exceeding 18 and not exceeding 21 months 65% of assessable profit
Exceeding 21 and not exceeding 24 months 60% of assessable profit
If a transaction is liable to Property Speculation Tax it is not also liable to income tax. For land held more than 2 years, there could still be a liability for income tax under the provisions of the general tax law, but this will depend on the particular circumstances of each case.

Other Matters
The Property Speculation Tax Act should be referred to for particulars of matters not covered by this item.

Examples are -

Where land is gifted (or there is some element of gift), the values and dates to be taken into account for donor and donee.
Allowable losses.
Company share transactions treated as land dispositions.
Leases with optional or compulsory purchase provisions.
Penal tax and publication of names for evasion.
Anti-avoidance provisions to combat attempts to "get around" the Act.
If you want more information on any aspect, please get in touch with the nearest tax office. We will also send, on request, a copy of the working notes given to our staff. These notes give more detailed information.

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Actually OC, while I have the greatest respect and admiration for your research - IRDGAF. I'm not a FHB nor an investor in property. For those who are, and expect change then lobby the relevant Minister or MP would be my advice. The housing horse has well and truly bolted - any attempts to close the stable door would be too little and way too late. Maybe better to let the whole thing implode - pretend it's a rerun of '87, just a different asset class.

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I am happy for property owners and investors and FHB to have tax free gains.
But get rid of the FIF regime and I will pay 33% on all my US equity gains when realized. No surprises here. With zero on interest in banks I am burning cash at the moment to fund FIF investments.
But I agree with you nobody is going change it now.
Lobbying the MPs is a waste of time they have their noses fully in the trough.
Only the media can do it by constant hitting them up including highlighting the distortion of property vs other taxable investments etc. But none will do it.

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tks OC for digging all that out. From my memory Norman Kirk was incensed when it came to his notice that a property in Seatoun Wellington (think he may have lived in that suburb) sold in under six months for over 50% of that vendors purchase price. My uncle worked for the IRD then and he said the government was going to stomp on it, such trading in effect. Personally cannot recollect whether or not it cooled that particular surge in housing values, but as said Muldoon took his time to repeal it. Probably someone such as Sir Robert Jones could well describe what actually transpired.

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And IRD were meant to be IT issue good.

The problems including GST returns, requiring IRD staff to hand hold on line form filling, as odd, unrelated numbers self populating online form fill and caculations of $due/refund is......

As for Green tax, tax away, as any Green tax raised will be balanced by other area tax reduction for said payers.

I Caracas.

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The government can still tax wealth, as pointed out by several observers a direct wealth tax is only one way to skin that cat.

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The "No new taxes" assertion may be tricky to work around. More levies?

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Might be a good time to pay some dividends

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Having Dr. Deborah Russell as an MP will mean we have an actual MP who understands the rip off of kiwisavers and international direct equity investors via the FIF regime.
Just maybe she can bring more attention to this as its is having a big impact on how much kiwisavers have at retirement.
I would be happy paying 33% on realisation than the status quo of taxing on an unrealised basis.

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It is unfortunate many Kiwis do not know the ills of the FIF regime. It is a blight on the wealth of the nation. A comprehensive CGT is a much more efficient and asset neutral than the FIF regime which has unfortunately boiled the domestic property market and erodes our national wealth.

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Terry Boucher THIS week :
The govt will keep its word and not introduce wealth taxes . . but they could instead start "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.".
.. so risk free rate of return / FIF regime are not really wealth taxes and introducing them would not break any promises.

Terry Boucher 3 weeks ago ( his column here dated 4Oct :

"Now, as you might expect, I have to explain the foreign investment fund rules to overseas clients. And they've conceptually struggled with it, because it's not a capital gains tax. But once it's and reframed in the idea of a flat wealth tax, they get it very quickly. And that's basically how I explain it to overseas investors. Effectively the 5% fair dividend rate is a wealth tax. And if your tax rate is 33%, you're talking about a 1.67% effective wealth tax.
"
.. so FIF regime IS a wealth tax.

Which one is it Terry ? - it cannot be both ...

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The Property Speculation Tax Act 1973 is not what I was referring to. What is surprising is the almost total absence of archival material on the "clawback" of interest. There is some reference to it here in a document by the "tax policy charitable trust"

I think this is it

The NZ Government has tried to stop property investors engaging in negative gearing by introducing legislative provisions restricting the deductibility of expenditure relating to land transactions. One attempt at this can be seen in section 129 of the Income Tax Act 1976 (“the ITA 1976”) which required taxpayers to be reassessed on interest previously allowed as a deduction on money borrowed to acquire rental land if the taxpayer sold the land for a profit within 10 years of the date of acquisition. Section 188A of the ITA 1976 also operated to restrict losses on such land to $10,000 per annum per person. However, these provisions were repealed by section 8 of the Income Tax Amendment Act (No. 3) 1990.

https://taxpolicycharitabletrust.org.nz/wp-content/uploads/2019/02/Nich…

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