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The Week in Tax: Briefing the new Minister of Revenue, extending the small business cash flow scheme, and should people paying for working from home pay higher taxes?

The Week in Tax: Briefing the new Minister of Revenue, extending the small business cash flow scheme, and should people paying for working from home pay higher taxes?

Last week, David Parker was sworn in as the new Minister of Revenue. As part of his transition into his role, Inland Revenue will have prepared a Briefing to Incoming Minister, which introduces him to his portfolio, his role and the department. As the briefing to Stuart Nash in 2017 explained,

This document “sets the scene” to the work we do and how we can support you and outlines the strategic context of our work…As Minister of Revenue, you are accountable for the overall working of New Zealand's tax system for Inland Revenue as a government department and for protecting the integrity of the tax system. You are also responsible for policy, direction and priorities and decisions on Inland Revenue overall budget.

We are here to help you support you, carry out your ministerial functions and servicing the aims and objects objectives you set. We do this by advising you on policy and strategy, implementing government policy and carrying out day to day functions of the department.

So that's the top-level view setting out what the respective roles are. And then the document will run through what's going on within the department and its key priorities. The 2017 briefing to Stuart Nash was rather internally focused, it talked extensively about Inland Revenue Business Transformation programme.

Three years on that's now largely complete. Although those who listen to last week's podcast will know that we there are some issues emerging there. So whether that is brought to the minister's attention, we'll know in due course when the briefing is released.

But certainly, I would expect other bodies, such as the Chartered Accountants of Australia and New Zealand who, as is traditional, are writing to the Minister of Revenue to say “Congratulations, here are a few things we think you need to look at”, I'm sure they will be raising that point with the new Minister.

Labour's tax priorities

Now, the document will then talk about what is the immediate government's priorities, as officials will have read Labour's manifesto and seen what directions they need to take on tax. So the first cab off the rank will be raising the top tax rate from 33 to 39% on incomes over $180,000. Now, that will require a tax bill, but that's a relatively straightforward matter and it’s planned to be pushed through before Christmas.

Now, the other policy objective outlined in Labour's manifesto was work on a digital services tax. And so we can expect Inland Revenue to carry on doing more work on that. This is an interesting space around the world. It seems that governments are hoping that the OECD can come to a resolution on international taxation by mid-2021, but they're enormously complicated tax issues to work through. And there's politics involved. And although the United States gets singled out for its lack of cooperation on that matter, they're not the only country which is raising objections to the OECD’s proposals

What is happening is that instead of waiting for the OECD, some countries such as the United Kingdom and India have jumped the gun and introduced a digital services tax. So that's something that David Parker and Inland Revenue would consider. I don't think, as I've said previously, they will move forward on it, but I suspect they will do a lot of policy work to have it ready.  They could then implement it if they feel that nothing significant is going to happen with the OECD.

Other pressing matters

But there will be other matters that Inland Revenue and David Parker will need to look at. There's a tax bill that was going through Parliament before the election. This is the Taxation (Annual Rates for 2021, Feasibility Expenditure and Remedial Matters) Bill. Now that bill will be reactivated and reintroduced into Parliament. The intention would be that it will complete its select committee processes and be enacted some time in March or April next year.

The bill includes an item which has picked up some attention relating to something called purchase price allocation. This is where parties to the sale and purchase of assets can allocate the sale price between them for tax purposes. Now, Inland Revenue has estimated that at the moment, differing allocations of prices between buyers and sellers could mean that the government is going to lose out on over $150 million dollars of revenue between 2021 and 2024.

What's been happening is some sellers and buyers have been picking differing values for individual parts of the businesses and taking the most advantageous tax position.  This means is that the seller and the buyer can probably report very different values for the same items. Now, this has been going on for some time. Inland Revenue has been raising some concerns about it, and the bill is designed to try to tackle that.

There's a report in Stuff written by Thomas Coughlan, which gives an example where the buyer and seller between them managed to reduce their tax bill by $7 million.

So that's one of the matters on the agenda for the new minister. It's worth pointing out that some of what goes on around that price purchase price allocation is driven by the fact we don't have a capital gains tax.

And that's going to be a growing issue for the government despite its declaration it's not going to introduce a capital gains tax because having increased the top tax rate for individuals to 39%, there's an 11 percentage point differential between the top rate for individuals and the company tax rate. That presents opportunities to try and convert income into capital. This is something Inland Revenue was already concerned about when the gap between the two rates was only five percentage points.

It's a worldwide issue. I see that the UK Treasury’s Office of Tax Simplification has suggested to the UK government, that it should consider aligning capital gains tax rates more closely with income tax rates.

Currently, capital gains tax rates in the UK top out at 28%, but the top personal tax rate is 45% so you it's quite a gap.  So the Office of Tax Simplification is suggesting change to discourage taxpayers from trying to disguise income as capital. That's something that's always going on in our tax system where if you don't tax capital gains, the temptation is for people who can to shift assets into the non-taxed category. So those pressures will be there all the time.

Another matter Inland Revenue and David Parker will want to look at is the question of the hidden economy. Last week, you may recall that I talked about the amount of tax being gathered from fraud and evasion was estimated to be about $160 million a year. That's about only 15% of what we think is going on in the hidden economy. In other words, a billion dollars a year of tax is being evaded there, but only 15% is being picked up. So there's more work to do there for the Department and the Minister.

And as we highlighted last week, the Department itself seems to have problems with its staff, with low morale. That, again, is something that needs to be addressed. So, David Parker and the new Parliamentary Under-secretary for Revenue, Dr Deborah Russell, will have plenty on their plates as they get into their role.

Doling out interest-free loans ...

Moving on, this week, the Government announced changes to the Small Business Cash Flow scheme.   

As promised, it has decided to extend the applications for the loan scheme from 31st of December this year, for a further three years, right through to 31 December 2023. The amounts that can be applied for will remain unchanged.

The other couple of other changes are potentially a little bit more significant. Currently, no interest is charged if the loan is repaid within one year.  That interest free period will be increased to two years. At the moment the loan can only be used for core operating costs They're going to broaden this so the loan can be used, for example, on capital expenditure.

Now, all this is really welcome stuff, and it's a precursor to a more permanent regime, which I would hope has higher lending limits, because as we've talked previously, a lot of small businesses are undercapitalised. There was that Inland Revenue report that suggested $10,000 dollars was the point above which taxpayers basically gave up trying to pay tax debt, which suggests that there are some very undercapitalised businesses.

... and then expecting banks to lend more to SMEs

More broadly speaking, the government needs to be putting pressure on the banks to lend more to smaller businesses. I understand that in reports filed with the Australian Stock Exchange about customer engagement and support for banks, small businesses are highly unfavourable in their commentary about the banks’ lending practises. So there's opportunities in that space.

And the Business Finance Guarantee Scheme, which was intended to help in this space, didn't actually take off to the degree it could. It was quickly overtaken by the lending on the Small Business Cash Flow scheme. Small businesses are very, very important to the whole economy and enabling them to secure steady finance is a matter for the broader economy, which needs to be addressed.

Taxing working from home

And finally, from the “Maybe not quite such a good idea, but you know what they're trying to do” ideas box, Deutsche Bank researchers have called for what they call a 5% ‘privilege tax’ on people choosing to work from home. The money would be recycled through to low-income staff.

This is actually come out of a major report Deutsche Bank prepared on rebuilding after Covid-19.  The idea behind the thinking is to compensate for the money that people working from home aren't spending on lunch breaks. Therefore employees who choose to work from home should pay an extra tax.

The idea is that the tax that could be generated from this should be redistributed to low income workers who cannot carry out their jobs remotely, such as nurses, factory workers and in some cases, retail workers.

Now, the estimate is that a 5% tax could raise US$49 billion a year in the US, €20 billion Euros in Germany and £7 billion in the UK.  The idea won't go very far, but it's an example the lateral thinking is starting to happen around the tax base. I think everything is being shaken up and so a decision that may have been taken years ago  that these are the tax settings and we're not going to change them has to be revisited in the wake of Covid-19 because that's changed everything.

For example, I think the Government with the pressure of the housing market, might be reflecting on whether, in fact, it was such a good idea to say no capital gains tax for the future.

And on that note, that's it for this week. Thank you for listening. I'm Terry Baucher and you can find this podcast on my Website or wherever you get your podcasts, please send me your feedback and tell your friends and clients until next week, Ka kite āno.

This article is a transcript of the November 13, 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 wonder if Deutsche bank are considering trialing that tax idea internally?

Basicically just tinkering with the current system. What we need is a structural overhaul with our tax system

Yup, wholesale reform, targeted at actual problem areas (e.g. housing investment and land banking) that isn't just an excuse to bring in a politically motivated inheritance tax or a CGT that is so broad and wide-ranging that it would capture everything from Kiwisaver to your old man's MK 2 Jag he's had for forty years because it's about sending a message to certain people, not creating an effective tax mechanism. At the moment we seem to be adept at choosing politically unpalatable options to have something to walk away from in the name of pragmatism, when we should probably start with pragmatism and work towards effectiveness.

I wish it were strange that the calls for tax reform were about tinkering around the edges to raise trivial amounts of money, but that is par for the course. Since the 1970s and 1980s New Zealand has evolved a tax system that is now very different from those used in most OECD countries, and there is an army of tax accountants, tax lawyers, and government servants defending the status quo. The biggest difference is the lack of social security taxes (other than the ACC charge) applied to labour income; these raise nearly 10% of GDP in tax revenue on average in the OECD, but only 1% in NZ. It is the single biggest difference in the tax systems of NZ and most OECD countries and it goes nearly unmentioned. This changes the focus of the rest of the tax system; it means NZ has rather high income tax collection by OECD standards, and since income taxes are applied to both labour and capital income whereas social security taxes are only applied to labour income, it means NZ has very low combined taxes on labour income and very high taxes on capital income - even without a CGT. There are several other differences: the taxation of retirement income accounts on an Tax-Tax-exempt (TTE) basis rather than an Exempt-Exempt-Tax (EET) basis, which disproportionately favours investment in owner-occupied residential housing relative to the rest of the OECD; no capital gains tax (a smaller difference, but strangely the one that is the focus in NZ); extremely low top marginal rates; and a peculiar insistence that capital and labour income be taxed at the same rates. Collectively, these differences mean the NZ tax system now looks very different to most other countries, and disproportionately favours distortionary types of taxes that are not particularly progressive. No wonder no other countries have seen fit to copy NZ. It is interesting that the countries which raise much higher amounts of tax, that have much higher incomes, and much more progressive tax systems (eg Ireland, Norway; Sweden; Denmark, Germany) have chosen very different paths to NZ; a much greater emphasis on incentive compatible social security taxes, a determination to tax capital income less than labour income to prevent the outflow of capital; and a willingness to tax people with high labour incomes (including tax accountants, tax lawyers, and highly paid civil servants) at much higher rates than they are taxed in NZ. Perhaps it is no coincidence that the choices of these economically more successful countries are more in keeping with standard optimal tax theory than the choices made in NZ.

I almost feel the only reason we get away with having such a shambolic system that seams to survive despite creating significant distortions is because both of our crucial foreign exchange earners tourism & agriculture can not be exported overseas. If NZ was was like your average Western Europe country i.e Denmark then we would be dependent on manufacturing too an extent. Such manufacturing would not survive in our taxation environment so the tax environment would have to change.

Thank you Andrew - your well informed and reasoned perspectives are always refreshing to find here.

Wasn't Labour's objective to encourage people to work remotely from home, so we weren't dependent on living in cities, polluting our atmosphere with car emissions with lengthy daily commutes.

A digital services tax certainly would not help small business and our economy, it would just increase the risk of economic collapse. We already have one of the highest Corporate Tax Rates in the world so adding yet another tax will be far too much!

I agree NZ is at peak tax and however Govt names any impost more taxes will decrease tax take and worse discourage the more productive from being more productive and nothing changes for the unproductive.