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The Week in Tax - notes from the International Fiscal Association Conference, Covid-19 resurgence support payments applications go live, and how rich are the rich?

The Week in Tax - notes from the International Fiscal Association Conference, Covid-19 resurgence support payments applications go live, and how rich are the rich?

Last week I was in Queenstown at the International Fiscal Association’s annual conference. This is probably the most attended tax conference in New Zealand for anyone interested in tax policy.

Traditionally, the conference is opened by the Minister of Revenue, and the Commission of Inland Revenue Naomi Ferguson attends together with many of the most senior Inland Revenue policy officials, many of whom make presentations on matters of tax policy.

The conference is held under Chatham House rules, which means I can't actually say too much about what was said in some presentations, but that does mean there's a fairly open and robust debate about tax policy, and that is helpful.

Topics on the first day included the implications of the new 39% tax rate, Inland Revenue’s compliance programme (which actually referenced last year's podcast episode with Andrea Black on the topic), the Taxation of Property, Digital Services Tax, and Anti Avoidance.

Now, last week I said I foresaw issues around actions being taken ahead of the increase in the 39% tax rate. And what was said at the conference has reinforced my concerns.

For example, people will need to look ahead and consider carefully how a change in a shareholder employee's salary will look to Inland Revenue.

The general consensus, by the way, was that paying dividends before the 31st March year-end should be OK. But I was one of the sceptics because my view is Inland Revenue might ask “You paid a very large dividend last year. Why didn't you pay a very big dividend this year when you could.”  So all that remains to be seen.

But there's also a point I hadn't previously considered. There's also potentially going to be some very adverse FBT implication if employers are not careful. 

This is because the FBT rate will also increase from 49.25% to 63.93% for those receiving benefits who are earning more than $100,000, actually some $132,000.

There's a risk, therefore, that an employer may apply the new rate to all employees with vehicles rather than just those earning above the threshold. What that means, there could be potentially be some quite significant overpayments of FBT. The problem is managing FBT is very complicated. There's the matter we've talked about previously about what is a work-related vehicle, for example.

But leaving that aside, how you actually go about applying the relevant rates of FBT is complicated. The FBT rules have been around relatively unchanged now for 30 odd years, so as one presenter said it’s probably time to have a closer look at these rules apply and operate.

IRD intervenes earlier

Moving on, applications for the COVID-19 resurgence payment went live on February 23rd. Now as of 7.30 Thursday morning, 9,500 applications for a total of $28 million had already been received and Inland Revenue had disbursed $6 million. The Commissioner of Inland Revenue and the Minister of Revenue in his opening remarks, both praised the efficiency of the new Business Transformation programme, which has enabled them to deliver very quickly things like the COVID-19 Resurgence Support Payment.

Now, I don't think the Commissioner will mind me revealing that Inland Revenue had also already picked up what they considered a number of what clearly fraudulent applications for the COVID-19 resurgence payment. So clearly the real time data enables them to deal with these applications very quickly, but also identify much more quickly where there's something wrong.

And that actually was the theme of one of the other conference presentations: Inland Revenue believes it is now able to intervene earlier and therefore stop things getting out of hand. I'm certainly seeing some evidence of that and this inevitably will help with the integrity of the tax system. If people who are trying to manipulate the system are caught very quickly that reinforces people's perceptions of the system's integrity. And that's good for everybody.

IRD looks at 'wealth'

The new Minister of Revenue, David Parker is also the Associate Minister of Finance, a continuing role from the last Government. Last year in his role as Associate Minister of Finance, he asked Inland Revenue and Treasury to undertake an analysis of wealth in New Zealand. And the report that was prepared for him in August 2020 was released as part of a story on Thursday.

The headline in the paper was that the wealthiest New Zealanders’ average tax rate was 12% on their total income. For this purpose income means all economic gains, including for example untaxed capital gains.  Inland Revenue and Treasury's definition of the wealthiest New Zealanders means anyone with net wealth exceeding $50 million dollars or more. The report noted that once you included all economic gains then 42% of this group were paying a lower tax rate than the 10.5% starting income tax rate on the first $14,000 of income.

Now, there’s quite a lot to digest in this report and the related fallout is already quite widespread. On Thursday I finished up speaking to Radio New Zealand's The Panel on that matter and also to Stuff about it. This is just another instance of the ongoing debate around the taxation of capital. Now, the taxation of capital wasn’t a topic that appeared on the International Fiscal Association's conference this year, but I imagine it will be at some point.

There was a paper on property taxation presented by Young IFA (one of the presenters of which included another previous guest of this podcast, Nigel Jemson. The presenters were basically saying the taxation of property is an issue we're going to need to think about changing, and offering up some options.

But one of the things that this survey highlighted is something that I've mentioned previously and that’s we don't actually have a lot of very good data in this area. The work that was done did included extrapolating data from the NBR’s Rich List along with data from held by the Reserve Bank of New Zealand and income included in tax returns.

There’s an ongoing controversy about the level of taxation paid by the wealthy.  This is slightly distorted by the fact that wealthy have investments in companies both listed and in their own trading companies. Now, those companies have paid tax imputation credits, but they haven't distributed them. So there's a latent amount of taxes which has already been paid and a second layer of tax representing the difference between the company tax rate of 28% and the personal rate will then kick in when the dividends are paid out. An interesting point of note is the top one percent in New Zealand apparently owns close to 70% of all listed companies on the stock market. Their portfolios are obviously much more diverse.

A distorting differential

And this differential emerging between the company income tax rate of 28% and the top individual tax rate of 39% was something that was discussed at the IFA conference. But another presenter pointed out something that has been going on for a long time and is that if you look at the distribution of taxable income and what you do see is a bell curve with two big spikes and those spikes are around $48,000 of income, which is when the tax rate goes from 17.5% to 30% and around $70,000 when it goes from 30% to 33%.  What’s more these have been in the system for some time.

And it was this which prompted me to say that there does appear to be some income manipulation going on in the self-employed sector. There's one estimate provided recently to the Tax Working Group which said that the self-employed may be paying 20% less on average relative to someone earning income subject to PAYE.

So there's going to be an ongoing debate around the taxation of wealth. There'll be focus, obviously, on the extremely wealthy and we need to know more about what wealth they hold and how it is held.

But we might also see Inland Revenue start to look at this issue of who is reporting income around the $70,000 threshold. It's quite conceivable, in fact, that people will not do too much around the increase to 39% for income above the $180,000 threshold because it's obviously going to draw attention.  However, the evidence seems to be that some manipulation has been going on at lower levels of income without attracting too much attention from Inland Revenue and that may change.

And on that note, that's it for this weekI’m Terry Baucher and you can find this podcast on my website or wherever you get your podcasts.  Thank you for listening and please send me your feedback and tell your friends and clients. Until next week Ka kite ano!

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"...the wealthiest New Zealanders’ average tax rate was 12% on their total income..."

Question from the audience to add context: How does that compare across the OECD? I seem to recall that in the UK that rate (EATR on the wealthiest) is about 20% because they where discussing where to raise taxation with a fixed minimum to pay for their Covid-19 program.

You would need to be careful comparing OECD averages as the report last week made several assumptions around income which don’t meet current taxable income definitions. And every country will have different income definitions. The report looked at theoretical effective income which didn’t allow for imputation credits, allowed for capital gains and assumed tax losses weren’t real. Our imputation system, while not common round the world, works well here as it encourages investing in small companies, and avoids double taxation when tax paid profits are allocated as dividends. If the government wants to move away from that system it would be a major policy change. And would have big impacts on investment in businesses.

If my employer were to start paying me a $1 million salary, I'd technically be up for 32.27% or $320,920 in tax.

By the supposed logic that wealthy people deserve to pay less tax as a percentage of their income because they're already high contributors in dollar terms, how would a $1 million salary (PAYE) earner reduce their tax bill?

It is legitimate for shareholders to choose to leave earnings in private companies tax paid at 28%. If they don’t need the income why would they distribute them? The shareholders are likely ultimately trusts, and the wealthy individuals don’t own the shares in their own right. I fail to see how wealthy people are avoiding paying tax if their investment vehicles are companies or PIES and the tax has been paid at 28% or 33% if paid to a trust, which is what our income tax system allows. The IRD/ Treasury report made several big assumptions which don’t mesh with our current income tax system at all. It was academic and based on supposition and what if’s. It was based on a theoretical economic income which is not what our income tax system is based on. But it is being erroneously reported that wealthy people only pay 12% income tax. Have heard of several well off clients complaining to their accountants, asking if they should move accountants so they can pay 12 % income tax, instead of 28 or 33%.

I suspect this topic is more at positioning tax on the wealth elephant in the country vs complaining about people using company to pass profits to themselves. That elephant being property capital gain. Low rates, endless leverage, and tax free - whats not to love?

Untill it starts to compromise the fabric of a balanced society - oh wait that was five of more years ago...

New Tax on the so called wealthy to generate approx $550 million. Fours days of borrowing by this government.
You cant tax your way out of the debt, its a known economic fact.

I doubt it will even net that much revenue which would only be about 0.5% of total tax revenue . But it sounds like a big number and appeals to the ‘sock it to the rich’ vibe this government likes to encourage, to deflect from its failures in managing the housing crisis. If the government can’t manage with the current income tax rates along with 15% GST and all the other levies and duties, it really needs to look at its spending.