Last week I discussed some of the submissions made on the latest tax bill and in particular the implications for persons providing accommodation through Airbnb or ride sharing via Uber or a similar app. Reading the comments to the transcript it appeared to me there is some confusion around these proposals. So, this week I thought I'd look at these proposals in a little bit more detail as I didn't actually cover off the Taxation Annual Rates for 2022-23 Platform Economy and Remedial Matters) Bill (No 2) to give its full title at the time of its (re-)introduction.
The key part of the Bill is the platform economy sometimes also known as the digital marketplace. Now there are two parts to the proposals that are contained in the bill. The first, and what I think is relatively uncontroversial, is the implementation of an OECD Information and reporting exchange framework. This would require New Zealand based digital platforms to provide Inland Revenue with information annually about how much users of those platforms had received from relevant activities.
Inland Revenue would then use that information as part of its administration in the tax system. In other words, checking to see that people who receive payments have returned those payments. It would also share the information with foreign tax authorities where that information related to non-residents. This is intended to take effect from 1st January 2024.
Although this is still to be passed into law, earlier this week New Zealand was part of a group of 22 jurisdictions who signed a multilateral competent authority agreement for the automatic exchange of information under the OECD Model Rules for Reporting by Digital Platforms.
So that process is proceeding even as the legislation is passing through Parliament.
As I said, I think this is relatively uncontroversial. It is supported by the likes of the Chartered Accountants Australia and New Zealand. Interestingly, however, BusinessNZ was less enthusiastic about the proposals although I think it's largely concerned about compliance costs.
It requested a delay in the introduction of the OECD based and reporting exchange framework, which isn't going to happen because we've already signed the agreement to say we're going to deliver it.
BusinessNZ also asked for Inland Revenue to undertake a quote, “clearer cost benefit analysis to ensure there was a clear understanding of the likely net benefit of the platform economy changes on the New Zealand economy”. That's a little bit surprising but probably reflects BusinessNZ’s concerns about compliance costs.
However, it's the second part of the proposal which generated most of the criticism and pushback from submitters that I referred to last week. The Bill proposes that the current GST rules on electronic marketplaces which apply to remote services and certain imported goods now be extended to “listed services”, which would include supplies of accommodation through Airbnb and other booking services, ride-sharing, beverage and food delivery services and services that are closely related with these services. These changes are intended to take effect from 1st April 2024. There’s a bit of lead time but it’s not that far off.
What these proposals are intended to address is an issue where some of the services provided would normally be subject to GST. But because they're being passed through these electronic marketplaces, apps, that's not necessarily happening. And a concern of Inland Revenue and the Government is ...
“Ïf this was to continue, it could have adverse consequences for the long-term sustainability of the GST system and place traditional suppliers of these services who are charging and returning GST at a competitive disadvantage. It could also undermine New Zealand's broad based GST system.”
You may recall that the Hospitality Association was one of those that supported the changes because of this risk.
What the bill does to address these concerns is require operators of electronic marketplaces such as Airbnb, Uber and the likes to become the deemed supplier of or for GST purposes where they authorised the charge for the supply of listed services to a recipient.
What will happen is the person who's actually provides the services (what’s termed “the underlying supplier”, such as the driver or someone providing accommodation to Airbnb), would be deemed to have made a supply to the operator within the market electronic marketplace, i.e. Airbnb, Uber or other rideshare operator. That particular supply would be zero rated for GST purposes so that the underlying supplier wouldn't be paying GST directly, but instead it would be the operator of the electronic marketplace who would be deemed to be supplier and making supplies of listed services of 15%.
Example 4: Listed services performed, provided, or received in New Zealand
Charlotte is based overseas and is looking for accommodation in New Zealand for an upcoming holiday.
She uses an electronic marketplace to book accommodation in a bach in Queenstown.
Under the proposed amendments, as the accommodation provided through the electronic marketplace is in New Zealand, the marketplace operator would be treated as the supplier of the accommodation and would need to account for GST.
Now where the person who actually supplies the accommodation to Charlotte is registered for GST, then the transactions between them and the marketplace provider would be zero-rate for GST purposes.
But if that person wasn't GST registered, there's going to be something termed a flat rate credit scheme which requires the app or marketplace operator to pass on as a credit, a proportion of the consideration charged for listed services.
Example 8: Basic operation of the flat-rate credit scheme for marketplace operators
Henry provides taxable accommodation through an electronic marketplace where the marketplace operator is responsible for collecting and returning GST on these supplies.
Henry notifies the operator of the electronic marketplace that he is not a registered person for the purposes of the GST Act.
Charlotte books accommodation that Henry provides through the electronic marketplace for $200 plus GST for the stay. The marketplace operator collects GST of $30 on the supply of the taxable accommodation that they are treated as making to Charlotte.
Knowing that Henry is not a registered person, under the proposed amendments, the marketplace operator applies the flat-rate credit scheme and calculates:
The marketplace operator would be required to deduct input tax of $17 from the $30 of GST payable to Inland Revenue and pass on the $17 to the underlying supplier as a flat-rate credit.
The marketplace operator would pay the remaining $13 to Inland Revenue, and this would be the net GST collected on the supply of the accommodation.
This example illustrates where I think BusinessNZ and some of the other submitters have a case about the potential complexities and compliance issues.
Notwithstanding these issues the critical point from Inland Revenue and the Government’s perspective is the proposals put everyone on a level playing field as far as GST is concerned. We will probably end up with more people registering for GST.
The net effect of this, according to the accompanying Regulatory Impact Statement, was about an extra $47 million in GST annually, but I've seen estimates that could run as high as $100 million. There is undoubtedly some complexity coming into the system, but I am of the view that in terms of business impact I don't believe it's going to be quite as harmful as submitters suggested. I think other factors like the state of the world economy are more important in that case. But we'll watch to see how what happens with the submissions process.
The expected errors emerge
Moving on, we've covered in the past the controversial Cost of Living payments. It emerged this week as part of the annual review of Inland Revenue by Parliament's Finance and Expenditure Committee that it considers between 70 and 80,000 people may have been incorrectly paid some or all of that $350 Cost of Living payment.
According to the new Commissioner of Inland Revenue, Peter Mersi at least 12,000 people were incorrectly paid the first tranche of $116.67 because of a “coding error”. Apparently, all these people had a negative portfolio investment entity balance, and as it was the only income they had they weren't actually eligible. But somehow this wasn't picked up in time.
And then, as been previously discussed, payments were made to others who had left the country but hadn't apparently updated their details according to Inland Revenue.
Since the first payments went out on 1st August, Inland Revenue has been checking people’s eligibility and as a result, the number of payments made has fallen as they remove what they consider ineligible persons. The first payments on 1st August were made to 1,480,000 people. The second tranche on 1st September went to 1,422,000, and the final payments on 1st October went to 1,384,000. So over the time of the payments, 96,000 fewer people received a payment for the third instalment compared with the first instalment.
So far, 177 people have returned payments and Inland Revenue is about to contact up to 80,000 about potential overpayments.
Separately, there's another 75,000 who haven't received any of these payments, even though they aren't eligible. And the reason they haven't done so is they've yet to supply Inland Revenue with bank account number details.
Now, as I've said previously, I thought mistakes were inevitable given the scale of what was happening. I was more concerned about systemic coding issues where there seem to be groups of people that shouldn't been receiving payments were reported as having received payments. And Inland Revenue has now acknowledged that one of those groups was this group with negative portfolio investment entity income.
I was also concerned about the fact that Inland Revenue estimated it would need somewhere between 750 and 1,000 staff to process the exercise. This bears out a concern I have about Inland Revenue being under resourced. I'm hearing stories that there's a lot of overtime being carried out by Inland Revenue staff which indicates there’s still a potential staff resourcing issue. No doubt we will hear more about these payments, and we'll update you on future developments.
Tax-free thresholds and where bracket creep hurts most
I’ve talked previously about a tax-free threshold. And this week, I and other several other tax advisers spoke to Susan Edmunds at Stuff about the idea.
Tax free thresholds are common overseas. Australia has an exemption for the first A$18,200. Britain has a personal allowance of £12,570 and France has an exemption of €10,225. But here in New Zealand as is well known, every dollar is taxed. And partly as a result of the cost-of-living crisis questions have been raised as to whether it's time to change.
The Tax Working Group did quite a bit of work in this space and it’s my view, as I expressed to Susan, the time's probably come for small exemption. I was thinking of in the order of $5,000, which was also the number the Tax Working Group landed on.
But the downside is such tax-free thresholds are expensive. For example if you were to exempt the first $14,000 of income, which is currently taxed at 10.5%, would cost $4.7 billion a year. So, there's a significant trade-off involved.
And there's another issue that the Tax Working Group identified, which is that a significant proportion of that benefit could also go to secondary income earners in households which were above the median income. Is that something we actually want?
Deloitte partner Robyn Walker talking to Susan Edmunds made the points ‘What are we trying to address here? Is a tax-free threshold the best tool to do so?’ I entirely agree with this. For example, if we're talking about the cost-of-living, then maybe controversial or not, it may make more sense to consider specific payments, such as happened with the Cost of Living payment.
Robyn also discussed the idea with RNZ’s The Panel. One of the things she mentioned is that there's a tool on the Treasury website where you can do your own modelling and calculate the effect of different changes to tax rates and you can see the cost of making changes to rates and thresholds.
But discussions around a tax-free threshold and changes to thresholds aren’t going to go away. And a particular point, both Robyn, myself and others keep making is that there's a lot of pressure on the group earning between $48,000 and $70,000 where the tax rate jumps from 17.5% to 30%. In our view this is the group that probably needs most relief and where politicians should be focused on improvements.
The politicians are undoubtedly working in the background on this issue. National's got its plan which is to index the thresholds. What Labour has got in the works, we don't know, but I'm pretty certain they’re planning something.
A winning idea
Finally this week, congratulations to Vivien Lei, who is this year's winner of the Tax Policy Charitable Trust Scholarship Award. Vivien is currently Group Tax Advisor with Fisher Paykel Healthcare. Her winning proposal was how to change New Zealand's environmental practices by introducing an impact weighted tax regime. Under this model, organisations would be taxed on their net positive or negative impact on the environment. A very interesting proposal.
Now we've had past winner Nigel Jemson on the podcast and I'm very pleased to say that Vivien will be joining us before the end of the year to talk about her submission.
And on that note, that's all 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 clients.
Until next time kia pai te wiki, have a great week!
*Terry Baucher is an Auckland-based tax specialist with 25 years experience. He works with individuals and entities who have complex tax issues. Prior to starting his own business, he spent six years with one of the "Big Four' accountancy firms including a period advising Australian businesses how to do business in New Zealand. You can contact him here.