The Week in Tax. 2020’s big tax stories from a year like no other and a look ahead to the unresolved issues - like the capital gains tax

The Week in Tax. 2020’s big tax stories from a year like no other and a look ahead to the unresolved issues - like the capital gains tax
Terry Baucher

This is the last podcast for the year so we will be taking a look back over the main tax stories for 2020.  It’s no surprise that the response to COVID-19 will feature very heavily but looking back the thing that stands out is how rapidly events developed and then the sheer scale of what we were dealing with.

In the podcast on Friday 16th March, I suggested some actions Inland Revenue could take in response to coronavirus following a week in which first Italy then the UK and finally Australia announced special measures throwing around huge sums of money.  By the following Friday we had the first COVID-19 support package including the first iteration of the wage and subsidy scheme.

From then on it was a frantic blur until late May with barely a week passing without one new measure after another.  Most of those did what they were intended to do: get money into the economy and keep people employed.  Some were more successful than others. The Business Finance Guarantee Scheme for example did not work as anticipated with only $176 million lent to 834 businesses by the end of August.

The Small Business Cashflow Scheme on the other hand was a huge success in getting money out too small businesses very quickly currently Over $1.6 billion has been lent to close to 100,000 businesses and the Government is now working on making the scheme permanent.

Some of the tax measures that have been announced such as increasing the provisional tax threshold to $5,000 on increasing the low value asset write off temporarily to $5,000 are measures that probably would have happened sometime soon possibly even this year it being an election year.  What COVID-19 did was make them make the Government bring forward those measures and into effect much sooner than otherwise might have happened.

It's also worth pointing out just how well the Ministry of Social Development and Inland Revenue handled the distribution of funds under the various wage subsidies and the Small Business Cashflow Scheme meant that the billions of dollars got very quickly to where it was needed and both organisations do deserve credit for making that happen. However, it undoubtedly put Inland Revenue under considerable strain and we'll come back and talk about that a little later on.

The immediate legacy of the response to COVID-19 is of course the Government's books being shot to bits. Interestingly the latest figures show the tax take has not fallen significantly and the deficit is more down to expenses increasing sharply such as the wage subsidies. 

The impression is that the economy has come through the crisis in better shape than was anticipated way back in March.

For all that the Government faces deficits for the foreseeable future so we had the somewhat unusual situation of it running an election campaign with a promise to increase tax income tax rate to 39% for income over $180,000. The increase in the income tax rate to 39% is expected to yield about $550 million a year but I suspect we may find it heals more than that because the economy has been in better shape than expected so far.

Aside from the Opposition, Labour’s proposal also got criticised from various sectors that the response was inadequate given the scale of the problem. There was also criticism, and this is going to be a continuing theme, that the income tax increase primarily on labour and earnings was not really where tax changes were needed.

Notwithstanding those issues, there are a number of complicated flow-on effects from increasing the top income tax rate to 39% such as resident withholding tax and fringe benefit tax. Then of course there are the significantly increased powers for Inland Revenue in respect to requesting information from trustees. 

This is something which is going to give trustees and beneficiaries pause for thought before they get involved in aggressive tax planning. The Government has made it clear that if it sees such activity it will increase the trust tax rate to 39%, something which Inland Revenue recommended should be done.

So the immediate impact of COVID-19 and the Government’s response has been the major tax story of the year. 

The second big tax story has been the ongoing capital taxation debate which is something I suspected might happen. Writing at the start of the year I suggested that although the Government had said in April last year it would not introduce a capital gains tax that would not mean the end of the story.

And so it proved. 

Throughout the year, particularly in the wake of COVID-19 and an unexpected housing price boom there has been a string of stories looking at the question of taxing capital either in the form of a wealth tax as proposed by the Greens or more recently an extended bright line test.  

In one recent article I suggested if the bright-line test is to be extended, a ten year timeline would be consistent with the other land taxing provisions in the Income Tax Act.  (Unsurprisingly how that ten year timeline is measured can differ between the various provisions).

What Geof Nightingale from the Tax Working Group pointed out in the same article really it would be fairer to have a comprehensive capital gains tax at a rate of 33% rather than the muddled approach to capital taxation we have presently and the previously mentioned complexities of increasing the top rate to 39%.

So, I think we're still going to see more on the debate around capital gains tax and taxing capital.  This is in part because of the housing price boom but also because many of the journalists covering the story are relatively young. Despite having good jobs they're struggling to get together deposits to purchase houses.  Effectively, they have been priced out of the market and understandably they're not happy about that. 

But they are in a position to make quite some noise about it so the Government will find this story isn't going to go away.  So, throughout 2021 and beyond there will be a steady stream of stories about what are we going to do about house prices and what role will tax have to play.

The final tax story of the year is the role of Inland Revenue; how it managed Its response to COVID-19 and then going forward how well is its Business Transformation programme really going?

As I mentioned previously Inland Revenue's immediate response to COVID-19 deserves praise. It took action to help clients running into difficulties with payments of tax including a number of measures which effectively wrote off interest on overdue tax where the taxpayer had been adversely affected by COVID-19. It administered the Small Business Cashflow Scheme very efficiently and it worked very closely with the Ministry of Social Development on the wage subsidy schemes. At its peak Inland Revenue was handling over 15,000 requests for verification from MSD each day in relation to the wage subsidy scheme.

At a tax conference during the year I asked Inland Revenue representatives there whether they would have been able to manage all the additional demands that came on them because of COVID-19 without Business Transformation and their response was that it had given them the additional capacity and flexibility to manage the demands put on them.  In particular the upgrade of the computer systems meant they could actually physically cope with what was coming at them.

So far so good, but as listeners will know, in recent works weeks I've raised questions around what exactly has been going on with Inland Revenue in relation to its audit and investigation performance in view of the fact that hours spent on investigation had fallen by two thirds over the past five years from over 680,000 annually to just over 240,000. That led to an interesting response from Inland Revenue Deputy Commissioner Sharon Thompson on the matter.

That exchange caught the eye of Auckland barrister and ex Inland Revenue investigator Riaan Geldenhuys. What he pointed out was that Inland Revenue was actually under some strain in delivering Business Transformation even before COVID-19 hit.

Riaan noted that in the Minister of Revenue’s regular reports to Cabinet on the progress of Business Transformation in July 2019 then Minister of Revenue Stuart Nash had noted that there were strains emerging because of the unprecedented response to Inland Revenue’s rollout of automatic assessments for all people on PAYE. 

Now as you might expect COVID-19 has exacerbated those strains and in his July briefing to Cabinet this year the Minister of Revenue noted that because Inland had had to divert staff from audit and collection to maintain services “no new audit or debt collection cases will be opened and existing disputes will be managed as judiciously as possible.” The report then went on to note that “Inland Revenue’s ability to support customers is currently stretched to capacity.”

Now of course an unexpected event like COVID-19 will have some flow-on effects but what is also emerged from these reports to the Cabinet is that the projected administrative savings that Inland Revenue promised the Government as part of the business plan for the Business Transformation programme have been completely wiped out.

The projection was that Inland Revenue would realise administrative savings for the period ending 30th June 2024 amounting to a total of $495 million. According to the latest report provided to Cabinet in July none of those administrative savings are now expected to be realised[1] so that's a $495 million dollar hit to Inland Revenue's bottom line and effectively the Government's by extension.

Earlier this year an academic article in the New Zealand Journal of taxation Law and Policy[2] was critical of Inland Revenue’s Business Transformation programme.  The author thought that Inland Revenue had prioritized staff reductions rather than strengthening its ability to improve collection of taxes particularly in the area of the cash economy.

On top of these issues of cost overruns and poor audit performance, there's a growing problem of strains in the relationship between Inland Revenue and tax agents.   Tax agents are increasingly exasperated by Inland Revenue’s actions in directly contacting clients about various tax issues ostensibly in the name of better communication. More often than not these calls result in confusion and duplicated costs which are often not recoverable.

So ,this combination of cost overruns, lower audit and investigation work and a strained relationship with a very significant group of stakeholders is something which is going to need careful monitoring by the new Minister of Revenue David Parker.  We will be watching with interest.

Well, that's it for this year. Thank you to all my guests and to all my listeners and readers I really appreciate your feedback and your patience in sticking with me throughout a tumultuous 2020. I suspect it will be well into 2021 before things settle back into what we might call normal.

Until then 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. Until next year have a safe and enjoyable Christmas. Ka kite āno.


[1] “The re-planning of organisation design changes may have implications for Inland Revenue’s ability to realise the administrative savings. The savings have already been removed from outyear baseline funding so the challenge for Inland Revenue is to manage within a reduced funding level. These savings are part of the funding available for transformation. It is too early yet for Inland Revenue to say what the implications will be.” (Para 59)

[2] Not available online publicly

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4 Comments

I'll ask the obvious question; with equities AND housing taking off to what most sane people would accept as unsustainable levels; have we missed the boat on a capital gains tax in terms of implementation? Does this need to be treated like RBNZ treats DTIs - the option is there when the time is right?

Extending the brightline tax to 10 years will have unintended consequences. Investors will sit on properties to avoid the tax reducing the available pool of houses for sale putting more upward pressure on prices. A comprehensive Cgt on all asset classes including the family home is the only sensible idea.

That underlines the focus is Tax free speculation. A CGT with ifs and buts will just change the behavior of avoidance. Universal land tax is needed, with kickers rates for empty properties and foreign ownership. Simple. Unavoidable. Enforceable. Inevitable.

I would agree. The current raft of options being banded about are all subject to "aggressive tax planning".

No-one really cares about hiding capital gains as it's not taxed, but if it were I'm sure there would be various "solutions" to minimize the tax take, just as the bright-line test only affects income tax by making the proceeds of the sale be considered income, which can be offset by expenditure.

There needs to be some sort of fair tax that cannot be swept under a rug, hidden in the bushes, or buried in the garden, but generally though, I think people wouldn't try so hard to avoid taxes if the tax revenue was being spent wisely.

The Small Business Cashflow Scheme was a good use of taxpayers money. The flag referendum was a total waste. Increased spending on health and education is good. Film industry subsidies are not. Social welfare is perhaps not good, but is a necessary expenditure. Foreign aid to countries that are developing their own aerospace industries should be scrapped.