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The Week in Tax; a new tax bill clarifies the GST treatment of cryptoassets, the latest lockdown developments, and Treasury's draft long term fiscal position briefing considers whether taxes need to increase

The Week in Tax; a new tax bill clarifies the GST treatment of cryptoassets, the latest lockdown developments, and Treasury's draft long term fiscal position briefing considers whether taxes need to increase
Wizard needed to sort out taxes to pay for Covid's and ageing's fast-rising costs

The Taxation Annual Rates for 2021 to 2022 GST and Remedial Matters Bill was introduced to Parliament on Wednesday. Now this is the annual bill which is required to confirm the tax rates for the current year. And it also contains a number of GST and income tax remedial amendments. It doesn't, by the way, include anything in relation to the proposed interest limitation rules. Those are going to be introduced separately, probably later this month, by way of a Supplementary Order Paper. 

Now, what's particularly interesting about this bill is that it clarifies the tax treatment of cryptoassets, and it has two proposed amendments which would exclude cryptoassets from GST and the financial arrangements rules.

As the commentary to the bill points out, cryptoassets probably fall within the existing scope of GST rules, although it's a little unclear. And that means that the supply of a cryptoasset could be subject to 15% GST, or it could be an exempt financial service or a zero-rated supply to a non-resident. And what this means is that GST supply to a non-resident is zero rated, but then subject to GST when applied to residents. And that creates a distortion and a preference to sell to offshore investors. Now, that's slightly different from the zero rating we do for exports, but it's not seen as an export service here.

But more importantly - and this is an issue that’s well known - is that there's a big risk of potential double taxation. That is when an asset is purchased with Bitcoin and then, for example, that Bitcoins converted back into fiat currency.

The commentary gives an example of Lucy purchasing $11,500 of Bitcoin from a domestic Bitcoin exchange. At present, the exchange is required to remit $1,500 dollars of this, being GST, to Inland Revenue on the taxable supply of Bitcoin they've made in exchange for New Zealand dollars. When Lucy uses the $11,500 of Bitcoin to purchase a car, GST applies on the sale of the car and therefore the company selling the vehicle must return another $1500 dollars of GST. So that means that GST of $3,000 has effectively been charged in relation to the purchase of a vehicle worth $10,000. If Lucy had used New Zealand dollars instead of Bitcoin, only $1500 of GST would have been paid.

This has been known for some time and what has happened is that the Government has decided they're going to take cryptoassets out of the GST net. And the proposal is that the definitions of goods and services in the Goods and Services Tax Act will be amended to expressly exclude cryptoassets. Now, this amendment will apply from 1st January 2009, the date of the first cryptoasset, Bitcoin, was launched.  By the way, the definition will exclude non fungible tokens, which are going to remain subject to GST if supplied by a registered person.

So this is a very welcome development, clarifying the position that was causing some concern in the cryptoassets world, for the reasons and the example I gave a bit earlier - that there was a probable chance of GST being charged twice in essence, on the same asset. But just remember that GST is still intended to apply for non-fungible tokens as they're regarded as a good or service that can be supplied.

Now, the other big amendment, which will be welcomed by investors in the cryptoassets world is that cryptoassets will be excluded from the financial arrangements rules. That will be done by amending Section EW5 of the Income Tax Act 2007 to define cryptoassets as an accepted financial arrangement.

Again, however, the issuing of non-fungible tokens are not financial arrangements and they do not meet the definition of a financial arrangements set up in the Section EW 3 of the Income Tax Act. This proposed amendment will also apply from 1st January 2009.

But there is one exception that people need to be aware of, that is cryptoassets will not be treated as an accepted financial arrangement if the owner receives amounts that are determined by reference to the purchase price of cryptoassets, and on the basis that is known by the owner in advance. The purpose of this exclusion is to say that cryptoassets that are economically equivalent to debt arrangements are still taxed under the financial arrangements rules.

And the commentary has an example of such a treatment. An investor invests in Bitcoin on a platform and Bitcoin is locked in for a set period and the investor is paid a guaranteed fixed return for the period that his Bitcoin remains locked into this particular platform. The commentary makes clear that the return on the growth will be taxable, so the additional 5% return will be subject to the financial arrangements rules. I think there might be some more questions dealing around that.

And the commentary also makes clear that the general rules still apply to cryptoassets. That if they're acquired with the purpose of disposal, they'll be taxable. Likewise, if you're trading cryptoassets or you use cryptoassets for a profit-making scheme. But as I said, all the proposals will be welcomed by the investors in the cryptoassets world.

Now, the bill also has proposed amendments in relation to the bright-line test. Firstly, any income derived on the sale of a property which has been used as a main home will not be reduced where the person has used the main home exclusion twice in a two-year period or has engaged in a regular pattern of acquiring and disposal disposing of residential land.

The bill also has an amendment to ensure that a main home that takes longer than 12 months to construct will not be subject to the bright-line test. And this is in relation to residential land acquired on or after 27 March 2021. There's also an amendment to clarify the application of the 12-month buffer and makes clear that a person may still qualify for the main home exclusion if they have multiple periods each of 12 months where the property is not used as a main home. So, again, that's welcome because there was some confusion around how these rules might apply.

Business subsidies for wide public health impacts

Now, moving on, the Government's Wage Subsidies bill has passed $1.2 billion dollars so far. And apparently this subsidy is supporting over 838,000 employees, 117,000 self-employed people and 242,000 businesses.

The highest number of supported workers are in the construction industry, followed then by food and hospitality.

Now, it's also been made clear that although most of the country has stepped down to Level Two - the wage subsidy is not normally available below Level Three – a claim is still possible if part of the country is still in Levels Three and Four. Because Auckland has remained at Level Four, that means that businesses outside Auckland may still apply for the wage subsidy. However, they have to show the 40% drop in revenue required to meet the wage subsidy requirements is attributable to the effect of the continuation of Alert Levels Three and Four.

So that's a wee caveat in there that people just need to be mindful of. I know that there's lobbying going on in relation to the hospitality industry, where the impact of Level Two restrictions limit numbers in bars and restaurants to 50 or fewer. Those lobbying want the ability to still apply for a wage subsidy because they're affected by that Level Two condition, not necessarily because of the ongoing Level Four lockdown in Auckland.

More taxes to pay for an ageing demographic?

And finally this week, government departments have been asked to prepare a series of long term insights briefings under the Public Service Act 2020. Now these are designed to make available to the general public information about medium- and long-term trends, risks, opportunities that may affect New Zealand.

Treasury has also got a requirement to produce a statement regularly on the long-term fiscal position - what's known as Long Term Fiscal Statement, and what it's decided to do is combine the two and it's released a draft paper for consultation, which makes fascinating reading.

One of the things it says, is that looking at the impact of Covid, it thinks net debt will now peak at 48% of GDP in 2023. And in the Treasury's view, there is currently no need to reduce debt levels. And it believes that deficits will shrink as the temporary support measures will end. And it also notes that debt level remains low relative to its peers such as the UK, Australia, America. The interest rate composition of debt is much more favourable than when net debt peaked at 55% of GDP in 1992.

And just as an aside, this is a global issue. The UK just this week has announced proposals which effectively increase taxes to pay for the impact of Covid and they’re quite significant increases. And I don't think that the UK will be the last jurisdiction to be doing so.

But longer term, Treasury is noting that 26% of the population is expected to be 65 years old or more by 2060, compared with 16% in 2020. So that's going to increase the cost of New Zealand superannuation and also expect healthcare costs to continue to grow because of an ageing population. And that ageing population will change demographics. For example, one of the things that's happening is that the Pasifika/Māori people are generally significantly younger than other New Zealanders.

For example, by 2038, Māori are projected to account for 20% of the total population, but only 10%of the 65 plus population.

And this leads Treasury to conclude:

 “Our projections indicate that the gap between expenditure and revenue will grow significantly as a result of demographic change and historical trends in the absence of any offsetting action by the Government.”

One of the offsetting actions it suggests, is to raise the age of retirement from 65. It suggests let's have a look at what would be the impact of raising it to 67.

It also looks at what opportunities exist to raise revenue from either existing tax basis or new tax bases beyond personal income tax. And the paper sets out a number of options around raising revenue. And one is ten years of fiscal drag, which incidentally we’ve just done, which is where the tax thresholds and rates are not changed. And wage growth naturally raises the tax take as people's income crosses income tax thresholds.

Some interesting stats here about the impact of raising GST. For example, in relation to personal income tax - if you raise income tax rates by one percentage point, so that the current top rate of 39% goes to 40%, the 33% rate to 34% and so on, that would raise 0.6% of GDP.

To get the same effect from GST you'd need GST to rise from 15% to 16.5%. And for company income tax, you'd need to raise it from 28% to 34%. So as the paper points out that would not be welcome.

The Treasury paper also points out the Government could extend the taxation of capital gains and maybe think about a land tax as well.  However, as the Tax Working Group pointed out there's a few issues around a land tax. But the paper notes, by the way, that other countries are looking at the taxing of wealth, either by a net wealth tax or maybe taxes on inheritance.

And finally, the paper notes that New Zealand raises less from environmental taxes than other OECD countries. It's equivalent to 1.3% of GDP, and that's lower than the OECD average, which is roughly 2% of GDP. But it points out that environmental taxes are often behavioural taxes. In other words, they change behaviours but therefore may not be a sustainable additional source of revenue.

Anyway, there's a lot of interesting data to consider in this paper. No doubt it will cause some controversy.

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 colleagues. Until next time Kia Kaha! Stay strong.


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22 Comments

Isn’t the whole point of cryptocurrency to avoid paying tax to ‘the man’?

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I can't speak for the developers of other 'crypto-currency', however Bitcoin was created primarily to avoid central banks eroding purchasing power through money printing - inflation is a tax I suppose.

Secondly it was developed to bank the unbanked. 

Bitcoin is an official currency of El Salvador and many more will follow. Bitcoin is one of the largest currencies it the world. If regulators in whatever country don't want to recognize one of the world's major currencies, that's up to them.

If regulators want to jump off a building believing they can fly, that's up to them too. Some people live in reality, some don't - Bitcoin doesn't care.

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Bitcoin is an official currency of El Salvador and many more will follow.

Heh, not any time soon. Bitcoin in El Salvador is likely to blow up and be shown as a complete failure within 12 months, mostly because the government has no idea what they're doing and are making lots of lofty promises they can't possibly keep.

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El Salvador's Chivo Wallet allows users to hold balances in both Bitcoin and US Dollars. Wallet users are welcome to convert into either.

Citizens of El Salvador's diaspora, sending money back to El Salvador from America can instantly send Bitcoin from America and their families back in El Salvador can receive it in US Dollars or Bitcoin.. or hold it in a combination of both.

Merchants can accept Bitcoin as payment and have it be converted instantly into US Dollars if they wish.

This is wonderful for the people of El Salvador. Not even mentioning the benefits of the above and the removal of remittance fees.. on a practical level this will avoid huge numbers on El Salvadorian people having to bus for hours to access financial services. 

El Salvador is being brave and I hope mighty forces come to its aid.

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Try talking to someone in El Salvador about what its like on the ground, instead of repeating government and Bitcoin bro propaganda that paints everything as rosy and perfect. 

I do every day.

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Economy doing so well in NZ = House Price and is so easy, fast and BIG that happy to pay taxes than slogging in business with all compliance and regulation for petty money and to pay tax after struggling.

In NZ economy tax is not a detterent, now as even after paying tax, may earn in a year that many may earn in a decade.

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The vast majority are getting exactly what they voted for. Complaints will be filed using a shedder.

If you don't like the situation, like many Kiwi's before you - perhaps NZ isn't for you? 

The reality is; if property purchases are made using new money, rather than money that already exists - prices will inevitably increase.

Those are the unnuanced facts,

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"If you don't like the situation, like many Kiwi's before you - perhaps NZ isn't for you?"

After all, you can always keep voting in NZ elections after you leave, provided you spend one measly day here an election cycle. 

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More regulation = more legitimisation as an asset class in my view

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More regulation = more tax revenues

make no mistake. The powers that be are starting to realise the threat that decentralised finance poses to the existing financial institutions. Finally we have an opportunity to replace the ticket clipping banksters

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The problem for the government is that it won the last election with the Prime Minister saying there would be no new taxes while she was PM.

This led to the decision to pass legislation to prevent rental property investors claiming interest expenses.  Unfortunately this has created more inequity in NZ as renters suffer from higher than normal rent increases, a diminishing supply of rental properties & an increased demand for emergency accommodation.

Property owners have been getting richer from increased housing prices & will continue to do so as the PM has indicated that she won’t allow property prices to fall.

Property owners will still continue to get tax free capital gains in this now highly distorted & inequitable market.  

Renters lose out as more rental property owners will transfer their investment from rental properties to their own home. 

Having different tax regimes for different types of residential property creates inequitable distortions & has absolutely no benefit to society.  It will have minimal impact on housing prices.

Higher interest rates are needed to increase housing affordability not inequitable & inefficient housing policy.

All major changes like this & possible future changes as outlined in your story should be supported by public opinion polls, especially when the government has not campaigned on the issue. 
 

 

 

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I believe we vote for the people in charge and they make the decisions.

Not sure what twisted version of democracy you're advocating. How about we just run the country based on Twitter referendums. 

Ridiculous.

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"Unfortunately this has created more inequity in NZ as renters suffer from higher than normal rent increases"

This is a complete line of bollocks, spread by those with their knickers in a twist over the sacred cow being on the chopping block.

 

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The problem for the government is that it won the last election with the Prime Minister saying there would be no new taxes while she was PM.

No. The promise was no new taxes except for the new 39% rate in this current term of government. So far they have kept this promise. 2 years to go until they can start implementing new taxes.

She promised never to implement CGT as PM, and not to change superannuation rate or eligibility.

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They jacked the top FBT up by 50% after saying there weren't making any further tax changes because they didn't realise they'd created a potential avoidance head-ache - and it seems like we're about to get congestion charging as well. 

And you damn well know that Labour spent years attacking National for not dealing with super or implementing a CGT and saying it was because they were lazy and ineffective as a government, only to get into power and achieve even less. 

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I guess all these greedy pensioners must be stuffing their orthopaedic mattresses with all this free cash, for them to be such a burden? I'm pretty sure the few that buy from my business are the exception? The profit on the free dollars they spend is 50% clawed back by the government in various taxes, fees, registrations, insurances, rates etc. The rest of this free pensioner cash, my business receives, is then circulated through various suppliers, trades people, professional services etc. It might even provide the odd job, here and there? Maybe even in the health industry, which I assume also pays taxes?

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A retiree that ends up in hospital care for let’s say dementia will provide all of their equity save $230K towards that care plus naturally their pension. The cost for a similar retiree without any equity above $230K will have that cost met entirely by the taxpayer. Having recently required to put  a senior member of our family through this process, can vouch for the ruthless and relentless audit the government assesses individual financial status for this purpose. No attempt on our part to conceal any detail but obviously that more than  surprised the assessors. Disappointing, but unfortunately understandable, everything these days comes down to be something of a fight for the correct outcome

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Right, I'm not commenting anymore today - I'm turning into a feral and can't catch a like lol :)

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It happens to the best of us.

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Do not lose heart, Zack - I liked your reply to Stewart.  There seems to be a misconception that our democracy should ask "the people" about everything.  But our flavour is Representative Democracy; We vote for them, then they make decisions.  Referenda are a breakdown of that process (which may or may not be a good thing).

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I agree Rob. It would debilitate a country to assume that the voted majority needed to wait 3 years to get a mandate to make decisions. We need to make the best choice we can at election time and accept that no person or government can make perfect decisions 100% of the time, but failing to make decisions and act would be a much more serious problem for the country.

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The UK has just increased social welfare ("National Insurance") taxes on the working age population to fund old age care. Given that in New Zealand our baby boom started in about 1940 and the average life expectancy is 82 I suspect many future tax increases between 2022 - 2045. As of now that trend has only just started.

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