The New Zealand Tax Podcast – Government moves to fix a Cyclone Gabrielle related bright-line test issue. Harsh lessons about underestimating. Inland Revenue and politicians and a very esoteric area of tax law

A few weeks back, an issue emerged over in the East Coast and here in Auckland about the potential application of the bright-line test to homeowners who had been forced to move out following Cyclone Gabrielle and the January and February flooding events. The issue was if they had to leave the property for more than 12 months while it was being repaired or because they could no longer live there, the bright-line test could apply if they were forced to sell within the relevant bright-line test period.

The Government this week announced that it is adding a Supplementary Order Paper (SOP) to a tax bill that's going through Parliament at the moment (and which will be enacted after the election).

The SOP contains proposals to ensure that the main home exclusion from the bright-line test is not affected by a property owner needing to vacate their North Island flood or cyclone damaged home for more than 12 months so it can be remediated or repaired. It also ensures the bright-line and other land-based timing tests, because we have a number of them are not triggered when local authorities all the crown buyback buyout or properties impacted by the 2023 Auckland flood events and or Cyclone Gabrielle. You'll recall that last month Auckland Council and the Government agreed to a $2 billion package which will be used to buy out homes that were rendered unliveable following Cyclone Gabrielle or the Auckland Anniversary weekend floodings.

So, this is a good result. That's the problem with tests, they can have some harsh results. But as the Government said, by picking up examples from what happened following the Canterbury earthquakes, it will devise tests to ensure that those harsh treatments do not follow.

Fooling around and finding out…

And speaking of harsh treatments, some harsh lessons were learned by a couple of taxpayers about tangling with Inland Revenue. In the first, an Auckland second town car dealer has been sentenced to six months community detention for tax fraud. The offender Mr Levada created a false identity and then as a director and shareholder set up two companies. The companies were then used to obtain GST refunds totaling $309,000 even though neither company traded. There was a bit of a hard story behind this in that he wanted to help his wife's family in Ukraine. But he admitted that he knew he was stealing and he has repaid the full amount owing.

Apparently, this got picked up by the Ministry of Business, Innovation and Employment in April 2021. And then obviously from there Inland Revenue realised what was happening. To me this is another example of why we really ought to think hard about GST compulsory zero rating between GST registered businesses. It reduces the opportunity for people to try and defraud the system. They don't always get away with it, as we've just seen here. But maybe remove the temptation in the first place is where I would go with my suggestion.

Avoiding tax by forgoing all income?

But that story is really quite tame compared with a story from Nelson in the New Zealand Herald. As I told the reporter this is “absolutely wild story”. Mila Amber had run into trouble with Inland Revenue and at the end of 2017 she was told she owed at least $110,000 in taxes, penalties and overpaid Working for Families tax credits. (In fact, the final figure was amended to nearly $365,000).

Amber decided to devise a scheme in cooperation with a UK based company under which she sold her property in Nelson to this company for $847,000. The buyer didn't have to pay a deposit or any interest and just would simply pay off the property over 25 annual payments with the first payment due a year after settlement. The deal meant that the property was out of the reaches of Inland Revenue if they were going to try and seize the property or force a sale to pay off the debts. Amber was made bankrupt, and the Official Assignee took the case to court to try and overturn the sale. Which is how all these details emerged.

It's just quite staggering what was attempted and what people thought was going to happen here. This seems to have been one of those cases where the taxpayer got really enraged by Inland Revenue's actions. She changed the name of her trading company to Abbey Services (Killed by Tax Maladministration) Ltd which as the judge in the decision, called it was rather unsubtle and refused to acknowledge the name basically in the judgement. The judge overturned the sale effectively transferring the property to the Official Assignee.

The judgement includes this rather jaw dropping line “It's hard to see how it is beneficial to avoid tax by forgoing all income” which may be true but didn’t work out for Ms Amber. As I told the Herald, as the property seems to have been mortgage free she basically dudded herself out of half a million dollars. She'd have done better to have sold the property, pay the tax and move on.

I use this case to repeat something I've said many times previously. When you run into trouble with your taxes, talk to Inland Revenue. Go forward and initiate action and in most cases, if you are making reasonable offers and reasonable attempts to meet your liabilities and Inland Revenue can see that you're being reasonable in your approaches, it will be prepared to find a way forward for everyone. In this particular case going around renaming your company Killed by Tax Maladministration and entering into a quite scandalously scheme to avoid those liabilities got the taxpayer nowhere.

I also think H.M. Revenue and Customs might be very interested as to how what was going with the UK company involved. And I would put good money on details of the case having been shared by Inland Revenue with HMRC. I know from experience that Inland Revenue and other authorities share information on a proactive basis. We’ve talked in other podcasts about the Common Reporting Standards for the Automatic Exchange Of Information. Tax authorities are sharing data on a vast scale now.

The cases of this Nelson lady and the second-hand car-salesman are more examples of never underestimating Inland Revenue because it may appear slow, but it will eventually catch up with you.

National’s foreign buyer tax proposal gets “very esoteric”

Having just talked about international tax agreements, it's very interesting to see the continuing debate around National's tax proposals, which I discussed last week and in particular the issues around the proposed foreign buyers tax. This has led to quite a debate with National confident that its numbers stack up and that it is legally possible.

The question raised last week continues to be asked ‘Well what about international tax treaties and the so-called non-discrimination clauses?’ It turns out that just after last Friday’s podcast was recorded, National went and sought advice from Robin Oliver, a former Deputy Commissioner of Inland Revenue, member of the Last Tax Working Group and a real guru of tax.

He told RNZ, this is a “very esoteric” area of tax law but it should be possible to introduce the tax.

In his view it would depend on tax residency, not nationality. In relation to the Chinese double tax treaty, it doesn’t allow discrimination on the basis of nationality. The potential argument is that a Chinese national residing in China who purchases property in New Zealand could be subject to the new law, whereas a Chinese national resident in New Zealand could not.

But even if it could be done, I'm of the view whether you should do that. Both myself and Eric Crampton the chief economist of the New Zealand Initiative think tank, told RNZ that, ‘Well, yes, it might be doable, but on the other hand, what would it do for our reputation internationally?’ We build our trade agreements around being an honest broker in this, that we follow a rules-based approach.

A point that was made at the recent International Fiscal Association trans-Tasman conference is that these tax treaties are often related to trade agreements. So, these sorts of issues would have been on the table and part of the discussions.  Having signed an agreement fairly recently and then now looking to apply a workaround to tax nationals from that country doesn't look good for our international reputation.

Just because you can doesn't mean you should

What this comes back to is a situation myself and other tax advisers I'm sure will sometimes encounter where we're asked to advise on something. We look at it and come back and we say, ‘Well, looking at the way the law was written we think it’s possible.’ But then sometimes the question boils down to ‘Well you could, but should you?’ Sometimes in tax just because you can doesn't mean you should.

Well, 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 to rā. Have a great day.