This week, an update on Inland Revenue’s Common Reporting Standard initiative, the Future of Tax, and what went wrong with introducing a capital gains tax.
I spoke recently of Inland Revenue’s new initiative on the Common Reporting Standard on Automatic Exchange of Information or CRS as it's commonly referred to. This is where Inland Revenue has received details of upwards of 700,000 accounts from overseas tax authorities. It is now working its way through that list of information it's received and has started to send out some letters to people where it considers there has been either under declaration or non-declaration of income.
I’ve found out a bit more about what's going on with this initiative, and it's a little bit concerning how it's being approached. So far Inland Revenue has sent out approximately 4,000 letters to various individuals with the latest batch of letters going out in the last couple of weeks, in fact.
But it seems to be slightly indiscriminate in its approach, I'm hearing reports of transitional residents who don't have to report overseas income, receiving such letters and then having to spend time on it.
The information that's been sent is for the period to 30th June 2018, and there’s another set of information coming for the period to 30th June 2019 very shortly. And apparently Inland Revenue is asking people to reconcile the numbers it’s received with what's in their tax returns, because there are sometimes big discrepancies.
Sometimes the reasons for those discrepancies are because the taxpayer has returned income under a special regime, such as the foreign investment fund regime or the financial arrangements regimes. The financial arrangements regime, as you may recall, deals with income on an accrual basis and brings into account unrealized foreign exchange gains.
So naturally, there are going to be significant differences between what's reported to Inland Revenue, the actual amount of interest paid by an overseas financial institution and what's been reported a taxpayer. So, it's a little bit disconcerting to hear Inland Revenue taking that approach.
One other thing that has emerged is that Inland Revenue is expecting where someone has not been compliant, that is, has not disclosed income for whatever reason, people to make disclosures for what’s called the open years, or not time barred tax years. This is usually four income tax years prior to the current year to 31st March 2019 for which a return is due. So that means that someone will have to be filing income tax returns covering the period from 1st of April 2014 onwards.
Just an aside on that. If Inland Revenue does feel that there's been deliberate evasion, where someone was receiving, say, substantial amounts of income and they really should've known they ought to have been returning this, it always has the right where there is tax evasion or fraud at stake to go further back than the usual four year period.
I'll keep you up to date on this developing story, as they say in the news. There's going to be some confusion. If you have been compliant it’s not a problem. But it is a bit of a headache trying to find out exactly what Inland Revenue is after. And if you've not been compliant, come forward and get it sorted out.
Getting to grips with BEPS
Currently, I'm at the Chartered Accountants Australia New Zealand Annual Tax Conference in Auckland.
It’s always interesting to see the developing trends in tax and catch up with colleagues. Several papers have been very, very interesting talking about the future of tax. Incidentally, because the larger organisations such the Big Four accounting firms and larger law firms that dominate attendance at this conference there’s a fairly international tax and transfer pricing aspect for many of the sessions.
But because of the OECD’s recent tax initiatives I talked about last week, there's very some interesting papers to be seen on this topic. Something one presenter talked about was that in some ways this development towards a global minimum tax rate may not be the sort of silver bullet to put an end to aggressive tax planning by multinationals some people might think it does. It does represent, as the present pointed out, a threat to the tax sovereignty of jurisdictions around the world. And that is something that hasn't really been talked about too much.
Traditionally each country, had its own taxing rights for activities carried out within the jurisdiction. Of course, the digital economy has just basically demolished that old precept which was designed almost one hundred years ago. Essentially, they're basically now obsolete. But what's coming and is still being debated may mean that countries have to accept that because of the way economies are now structured the taxing rights are going to change.
And here's the thing, New Zealand is a small economy basically at the edge of the world on these matters. And to a large extent we will have little say as to what happens, how we can apply tax rules and what our cut, so to speak, of this digital economy tax take will be. And that’s something to really think about.
On the other hand, New Zealand tax officials are actually quite heavily involved in this OECD process. The Minister of Revenue and Minister of Finance both spoke at the conference. They gave an interesting political take on matters (they took questions as well).
Both of them singled out Carmel Peters of Inland Revenue for her work within the OECD and Carmel is in fact, recognised as one of the top 100 most influential women in the tax community worldwide. This is a fantastic achievement when you consider how small New Zealand is for someone to be held in that regard.
This is a by-product of New Zealand's Generic Tax Policy Process which is regarded very well worldwide and how co-operative tax professionals and Inland Revenue are in developing and implementing tax policy. So that's encouraging. We may yet be effectively getting some crumbs at the table, but maybe we're going to be helping set the table, so to speak.
Cutting out tax professionals
Another paper that caught my eye, which is very interesting and something I’ve also talked about in past podcasts, is what's happening in indirect taxes and GST in particular. The guts of it is governments are really moving to basically disintermediate the tax professionals. That is, they're going to cut out the middleman.
In some jurisdictions, China, India were mentioned, they are setting up a GST system or its equivalent where GST registered persons can only operate if they basically have a central government approved software where all transactions are automatically recorded and sent back up to and through this software to the tax authority. So, there's no longer a question of gathering information, preparing a tax return and then filing it after a certain period time. Basically, everything's going real time. And that's actually not surprising given the way the Cloud technology is developing.
But it has put Inland Revenue and the Australian Tax Office at a little bit of a disadvantage compared to these other jurisdictions and the likes of Sweden, where, as I’ve previously mentioned, all credit and cash registers are centrally linked. The ATO and Inland Revenue are a little bit behind the game on this, but as the presenter noted although they may not be pursuing this trend at the moment, on the other hand, they're probably ahead of many of the new jurisdictions in their ability to analyse the data they do receive.
And that's something people should always be aware of, that Inland Revenue now has greatly enhanced capabilities. And it is almost certainly running its eye over the data it's receiving, watching for the transactions which a café may not be ringing through.
By the way this presenter was from Australia and after he paid in cash for a coffee, he wasn’t given a GST receipt even though he requested one, which as he rather wryly said “I didn't know that New Zealand's GST system operated like that”. But what's going on there is almost certainly a case of tax evasion.
What went wrong with the CGT proposal
And finally, Robin Oliver and Geof Nightingale who were both on the Tax Working Group gave their views on went wrong with the attempted introduction of a capital gains tax.
Both were very clear that the political process of managing the introduction of a capital gains tax was badly handled right from the get-go. Furthermore, the design probably adopted a too purist approach. Robin Oliver highlighted a few of the differences between the proposals and how Australia designed its CGT.
And the combination of an overly pure design, a poorly managed process in terms of selling a capital gains tax and its potential benefits meant that it really was quite a derailed process. As Robin noted the stars had to align for it come through. And they didn't align at all, so it fell over badly.
What they also talked about is, well, what happens next? Fortunately, the government's books are in surplus and the fiscal strains of superannuation and rising health care costs for the elderly are still some years down the path. But both thought that in 20 years’ time, the issue of capital gains tax will be back. And both Geof and Robin said that we have a significant asset class in land which is under taxed and that is not sustainable long term.
So that is a matter which will continue to be debated. We've got an election coming up and there was some commentary in the room about what is going to be the tax policy of the government going forward. There's some talk, for example, about rejigging the rates and maybe increasing the top tax rate.
All that's in the future. And we shall just have to wait and see.
And finally, just like a quick shout out to all the listeners and readers I've met at the conference so far. Thank you all for your kind comments and suggestions for topics and guests. Please keep them coming.
I'll have more about the CAANZ tax conference next week. In the meantime, that's it for the week in tax. I'm Terry Baucher, please send me your feedback and tell me your friends and clients. And until next time have a great week. Ka kite āno.
This article is a transcript of the November 22, 2019 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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