#Doubletaxationisgross

Let’s talk about tax.

Or more particularly let’s talk about tax and companies.

Well dear readers what a week it has been in the Beltway. Secret recordings down south and secret payouts from Wellington. All the more bizarre as – Mike Williams confirmed – MPs staffers pretty much have sack at will contracts. If your MP doesn’t like you – that’s it you’re out. No lengthy performance management for them. Facepalm. So maybe this factoid could get added to new MPs induction? 

But as always the key issue gets missed. Exactly who under 40 years old knows what a dictaphone is?

And into this maelstom Inland Revenue released a paper on taxation of individuals and some stuff on debt. Both worthy topics of discussion. But then Ryman released its results. And their CEO said like tax is paid – just not like income tax and just like not by them. 

So after last week’s post I thought I’d have a look. 

Oh yes the real tax is very easily found in the Income Tax Note. Tax losses of $28.9 million in the 2017 year. Up from last year when they were only $15 million of losses. They are a growth stock after all. Quite different from the tax expense which was $6m tax payable. 

To your correspondent this looks awfully like her specialist subject of interest deductions for capital profits. All mixed up in a world where interest expense isn’t in the P&L but instead added to the asset value. Complying with both accounting and tax. And yeah totes a tax loophole but one from like whenever. 

And again in Ryman’s accounts the rent equivalent from the time value of money of the occupancy advances is in neither the accounting nor the tax profit. Because reasons.

Now expecting controversy the CEO front footed the issue saying that the shareholders paid tax and that Ryman had actually paid GST.  He then also referred to the PAYE deducted as they were employers. Kinda going to ignore that bit tho coz the whole claiming credit for other people’s tax really gets on my nerves.

And I’ll take his word on the GST angle coz I am cr@p at GST. But with his shareholders paid the tax comment – he is talking about imputation. And as I haven’t covered that before dear readers – today you get imputation. Oh and other random thoughts on tax and companies.

Now the official gig about imputation is how – notwithstanding that they are separate legal peeps – the company is merely a vehicle for their shareholders to do stuff. So for tax purposes the company structure should – sort of – get looked through to its shareholders. And this means dividends are in substance the same income as company profits and so should get a credit for tax paid by the company.

And as a tax person this stuff is considered to be in the stating the flaming obvious category.

But as I am no longer an insider – I am increasingly finding it interesting just how public policy on companies manages to talk out of both sides of its mouth. And how – much like the sack at will contracts or milliennials using dictaphones  – no one has noticed.

On one hand we have the Companies Act which sets up companies with separate legal personalities from its shareholders. Meaning that if you transact with a company and it doesn’t pay you. Bad luck bucko. Nothing to do with the shareholders. Limited liability; corporate veil and all that.


But for tax if you only have a few shareholders those losses can flow through to the shareholders and be offset against against other income. The negative gearing thing but using a company.  Coz in substance the company and shareholders are like the same.

And a similar thing happens with the Trust rules. Trust law says that it is trustees that own the assets. And once you have handed stuff over to them as settlor – that’s it  – that stuff isn’t yours anymore. So if that settlor owes you money – also bad luck bucko. Don’t for a second think you can approach the trustees – coz whoa – settlor nothing to do with them.

But then tax says  – for trusts –  as settlors call the shots; it’s the residence of the settlor that is important. Mmmm. This means that a trust with a New Zealand resident trustee and a foreigner wot gave the stuff to the trustee – foreign trust – isn’t taxed on foreign income. Coz that would be like wrong. Even though the assets are owned by a New Zealand resident. And New Zealand residents normally pay tax on foreign income.

Right. Awesome. Thanks for playing. 

Anyway back to imputation.

Now put any thoughts of separate legal personalities outside your pretty heads dear readers and think substance. Think companies are vehicles for shareholders. Don’t think about small shareholders having no say or liability if anything goes wrong. Just think one economic unit.

And then you will have no problem seeing potential double taxation if profit and dividends are both taxed. Coz #doubletaxationisgross.

So as part of the uber tax reforms in the late eighties imputation was brought in. Tax paid by the company can be magically turned into a tax credit called – imaginatively – an imputation credit which then travels with a dividend. Creating light and laughter in the capital markets. Or as I have put to me – increased inequality. As when imputation came in it gave dividend recipients – aka well off people – an income boost courtesy of the tax system. Probs also a tax free boost in the share price too.

Now putting aside such inconvenient facts – your correspondent has always defended imputation. Because in order to get the light and laughter or increased inequality – companies actually have to pay tax. And of that – big fan. 

But all of this is only useful if shareholders are resident. Coz the credits only have value to New Zealand residents.  And this is kind of why foreign companies may not care about paying tax here. And did I mention tax has to actually be paid?

And this last point that brings me back to Ryman’s chairman. He is right. If the company doesn’t pay tax – then the shareholders do when a dividend is paid. So honestly what are we all getting excited about?

Well – profits have to be like actually distributed before that happens and shareholders have to be taxpayers. And Ryman distributes less than 25% of their accounting profit. 

And the residence of shareholders? Who knows. Lots of nominee companies listed which could mean KiwiSavers or non-residents. Oh and Ngai Tahu. Who seems to be a charity.

So yeah maybe. Some tax will be paid by some shareholders. That is true. Let’s hope it exceeds the tax losses Ryman is producing.

Andrea

PS. This will be the last post – except if it isn’t – for the next couple of weeks. Your correspondent is getting all her chickens back for a while. And much as I love you all dear readers – I love them more. Until Mid July. Xx

No accounting for tax

Let’s talk about tax.

Or more particularly let’s talk about accounting tax expense.

Now dear readers the most unlikely thing has happened. A tax free week in the media. No Matt Nippert on charities – just for the moment I hope – no Greens on foreign trusts. No negative gearing and – thankfully – no R&D tax credits. So with nothing topical atm – we can return to actually useful and non-reactive posts. And yes I am the arbiter of this. Although the whole Roger Douglas and his #taxesaregross does warrant a chat. Need to psyche into that a bit first though.

So I am now returning to my guilt list. Things I have been asked to write about but haven’t . That list includes land tax; estate duties; some GST things; raising company tax rate; minimum taxes; and accounting tax expense. 

And so today picking from the random number generator that is my inclination  – you get accounting tax expense.

At the Revenue when reviewing accounts one of the things that gets looked at is the actual tax paid compared to the accounting income. This percentage gives what is known as the effective tax rate or ETR.  And yes there are differences in income and expense recognition between accounting and tax but for vanilla businesses –  in practice  – not as many as you would think. 

Now it is true that a low ETR can at times be easily explained through untaxed foreign income or unrealised capital profits. But it is also true that for potential audits it can be a reasonable first step in working out if something is ‘wrong’. Coz like it was how the Banks tax avoidance was found. They had ETRs of like 6% or so when the statutory rate was 33%. 

So when I ran into a May EY report that said foreign multinationals operating in New Zealand had ETRs around the statutory rate – I was intrigued. 

Looking at it a bit more – it was clear that it was a comparison of the accounting tax expense and the accounting income.  Not the actual tax paid and accounting income. Now nothing actually wrong with that comparison but possibly also not super clear cut that all is well in tax land.

And I have been promising/threatening to do a post on the difference between these two. So with nothing actually topical – aka interesting – happening this week; now looks good.

Now the first thing to note is that the tax expense in the accounts is a function of the accounting profit. So if like Facebook NZ income is arguably booked in Ireland  – then as it isn’t in the revenues; it won’t be in the profits and so won’t be in the tax expense.

Second thing to note is that the purpose of the accounts is to show how the performance of the company in a year; what assets are owned and how they are funded. One key section of the accounts called Equity or Shareholders funds which shows how much of the company’s assets belong to the shareholders.

And the accounts are primarily prepared for the shareholders so they know how much of the company’s assets belong to them.  Yeah banks and other peeps – such as nosey commentators – can be interested too but the accounts are still framed around analysing how the company/shareholders have made their money.

And it is in this context that the tax expense is calculated. It aims to deduct from the profit – that would otherwise increase the amount belonging to shareholders – any amount of value that will go to the consolidated fund at some stage. Worth repeating – at some stage.

First a disclaimer. When IFRS came in mid 2000s the tax accounting rules moved from really quite difficult to insanely hard and at times quite nuts. Silly is another technical term. That is they moved from an income statement to a balance sheet approach. Now because I am quite kind the rest of the post will describe the income statement approach which should give you the guts of the idea as to why they are different. Don’t try passing any exams on it though.

Now the way it is calculated is to first apply the statutory rate to the accounting profit. And it is the statutory rate of the country concerned. That is why it was a dead give away with Apple – note 16 – that they weren’t paying tax here even though they were a NZ incorporated company. The statutory rate they used was Australia’s.

Then the next step is to look for things called ‘permanent differences’. That is bits of the profit calculation that are completely outside the income tax calculation. Active foreign income from subsidiaries; capital gains and now building depreciation are but three examples. So then the tax effect of that is then deducted (or added) from the original calculation. 

For Ryman – note 4 – adjusting for non-taxable income takes their tax expense from from $309 million to $3.9 million. That number then becomes the tax expense for accounting. 

But there is still a bunch of stuff where the tax treatment is different:

  • Interest is fully tax deductible for a company. But – if that cost is part of an asset –  it is added to the cost of the asset and then depreciated for accounting. And the depreciation will cause a reduction in the profits over say – if a building – 40-50 years. So for tax interest reduces taxable profit immediately while for accounting 1/50th of it reduces accounting profits  over the next 50 years. 
  • Replacements to parts of buildings that aren’t depreciable for tax can – like interest – receive an immediate tax deduction. But for accounting a new roof or hot water tank are added to the depreciable cost of the building and written off over the life of the asset. 
  • Dodgy debts from customers work the other way.  Accounting takes an expense when they are merely doubtful. But for tax they have to actually be bad before they can be a tax deduction. 

These things used to be known as timing differences as it was just timing between when tax and accounting recognised the expense.

And then the difference between the actual cash tax and the tax expense becomes a deferred tax asset or liability. It is an asset where more tax has been paid than the accounting expense and a liability where less tax has been paid than the expense.

And the fact that these two numbers are different does not mean anyone is being deceptive. They just have different raisons d’etre. Now if anyone wants to know how much actual tax is paid – the best places to look are the imputation account or the cash flow statement. The actual cash tax lurks in those places.

But yeah it does look like actual tax. I mean it is called tax expense.

Your correspondent has memories of the public comment when the banking cases started to leak out. I still remember one morning making breakfasts and school lunches when on Morning Report some very important banking commentator was talking. He was saying that the cases seemed surprising coz looking at the accounts the tax expense ratio seemed to be 30%. [33% stat rate at the time]. But that 3% of the accounting profits was still a large number and so possibly worthy of IRD activity.

Dude – no one would have been going after a 3% difference. 

In those cases conduit tax relief on foreign income was being claimed on which NRWT was theoretically due if that foreign income were ever paid out. So because of this the tax relief being claimed never showed up in the accounts as it was like always just timing.

Except that the wheeze was there was no actual foreign income. It was all just rebadged NZ income. And yeah that income might be paid out sometime while the bank was a going concern. So it stayed as part of the tax expense. Serindipitously giving a 30% accounting effective tax rate while the actual tax effective tax rate was 6%.

And a lot of these issues are acknowledged by EY on page 13 of under ‘pitfalls’. 

So yeah foreign multinationals – like their domestic counterparts – may well have accounting tax expense ratios of 28%. But whether anyone is paying their fair share though  – only Inland Revenue will know.

Andrea

Deregos

Let’s talk about tax.

Or more particularly let’s talk about the tax rules for deregistering charities.

It has been a big intellectual week for your correspondent. Tuesday night White Man Behind a Desk. No tax. An interesting riff on immigration that Michael Reddell clearly wasn’t the tech checker for. Wednesday night Aphra Green Harkness Fellow on US criminal justice reform coz States just ran out of money. Tried to run an argument that this was the good side of low taxes. Didn’t resonate – go figure. And Wednesday morning – Roger Douglas on turning taxes into savings coz #taxesaregross.

And it was on the lovely Roger I planning to write but on Friday was the Greens on how there were bugg@r all foreign trusts reregistering. So I thought I’d write about that and the genius decision to require disclosure rather than taxation.

And as if that wasn’t enough. Saturday morning the latest Matt Nippert on a US and charities thing. An elderly couple with no heirs wanting to transfer wealth to a charitable institution – awh lovely. So nice they chose NZ. But also Panama, low distributions and references to the IRS. Ok. Initial reaction was it looks like FATCA avoidance coz NZ charities are outside its scope of reporting to IRS. Really must get on to my ‘US citizenship is not a good thing for tax’ post. It has been in the can for longer than this blog has been running. So embarrassed.

But one thing really caught my eye. The charities had voluntarily deregistered. Mmm interesting.

Your correspondent now moves a tiny bit in the Charities NGO sector. And from time to time I hear ‘should we stay a charity? Coz need to be careful over advocacy and ActionStation isn’t a charity and it is alg for them.’

To which I try to reply in my best talking to Ministers language: ‘ That’s one option. It would mean handing over a third of your  reserves in taxes or all of your reserves to another registered charity. But totes –  if that is what you want.’  

Strangely the conversation doesn’t continue.

Coz the law changed in 2014 to stop the rort of charities getting lots of lovely tax subsidised donations, not distributing; deregistering and then keeping all that lovely taxpayer dosh for themselves. Go Hon Todd!

Now on the face of it this should apply to our friends here very soon. Section HR 12 applies a year after deregistration and turns the reserves – less wot go to another charity – into taxable income. 

Except there doesn’t seem to be anything explicit that makes it New Zealand source income. Possibly personal property or maybe indirectly sourced from New Zealand. But the source rules are kind of old school and want to bite on real stuff not deemed income. No matter how worthy of New Zealand source taxing rights it should be.

And of course none of this matters dear readers if the entity is New Zealand resident. Coz everything gets taxed! And as the trustees are a New Zealand company – high chance it will be. So alg.

Well almost.

Coz if the dosh in the charity all came completely from non-residents – the trust rules make it a foreign trust.  And foreign source income aka income wot doesn’t have a New Zealand source is not taxed. So initial view – unless the source rules can bite on this deemed income or the trust isn’t a foreign one – there will be no wash up for our friends here.

Now on one level that is cool. The final tax was all about clawing back the tax benefits given on the initial donations and the charitable tax exemption on income. Here it would have been tax exempt anyway. So alg.

The other argument is that these guys intentionally registered as a New Zealand charity. Got all the good stuff like potentially non- disclosure to IRS as well as being to say they are a legit NZ charity. But now don’t get the bad stuff.

And NZ gets the bad name but not the income. What does that sound like? Oh yes the NZ Foreign Trust rules.

So glad that – according to the Greens – is coming to an end. Shame it had to be such a resource intensive way of doing it.

Andrea

‘Taxes are gross’

Let’s talk about tax.

Or more particularly let’s talk about the deadweight costs of taxation.

For those of you who have liked this blog’s Facebook page you will know that your correspondent was recently a little over excited at getting a credit for tech checking White Man Behind a Desk‘s video on Tax Avoidance

For those who have yet to watch it. Do it now! Like immediately. The rest of this post can wait.

There are a number of videos in their stable including indigenous rights; prisons and now Tax. My world is complete.

Particular favourite is the one on Social Bonds. ‘That’s friendly Pierce Brosnan and friendly Daniel Craig’. Again its like they made it specially for me. It has tax and prisons. Including a brilliant discussion of contracting out and Serco’s role. Who are now apparently also bidding for: ‘the nighttime; the colour Magenta; and the feeling of hope.’ 

If I could just like teach Robbie some more tax – he could so take over this blog. 

Anyway no more spoilers – go and watch this one too. Please come back though. You can like us both. Wellington peeps WMBAD is live at Circa. Go and see him!

Now in Social Bonds is a quite inspired discussion of tax economics  – aka taxes are gross. And also a pretty good imitation of tax economists. Robbie – if you are reading this change ‘incentives’ to ‘distortions’ and you will have totally nailed it.

For the rest of you as a bit of a public service I thought I might unpack the ‘nya, you know ahh, mnew, gross’ discussion at 1 minute 30. Coz in that Robbie is talking about the deadweight cost of taxation.

Now we all know about the compliance cost aspect of taxation. And should we ever doze off on that one the Business lobby groups will be more than happy to remind us. And we all also know about the administrative costs of taxation – aka the great public service that is Inland Revenue. But the cost of taxation through behavioural changes is often hidden or not acknowledged. 

And these behavioural changes are called deadweight losses or excess burden or efficiency losses. They relate to the activity or production or purchase that won’t happen simply because there is a tax on it. The other costs – compliance and administration – are still real ones but in these diagrams they are assumed away to explicitly show the economic costs.


This is to be contrasted with the loss of income or wealth that has simply been transferred to the government in the form of taxation. In our diagram the deadweight cost is in red and the tax collected in blue. Interesting colours politically. Possibly an American diagram.

Now the degree to which this happens is a function of the ‘elasticity’ of whomever or whatever is subject to the tax. Aka the slope of the demand or supply curve. 

And the textbook example of a product that is highly inelastic is insulin for diabetics. The demand for it will occur irrespective of its price. Taxing it will be a one for one transfer from the diabetic to the consolidated fund. This is the theory. And as the mother of a Type 1 diabetic can confirm it is also totes the practice. In this case the demand curve will be completely vertical meaning no deadweight cost. Woohoo or total tax grab – up to you which one.

All blue now no nasty red.


Cigarettes from memory has an elasticity of .5 meaning it isn’t a total tax grab as there will be a reduction in actual demand with a tax increase. But still fairly inelastic.

Income tax is much harder. I do know in the early 2000s when I returned to work and still had young children, the 39% tax rate actually made my decision to cut my hours easier. 

And Treasury looked at this for the natural experiment that was the 39% tax rate. They found for wage income the elasticity was 0.414 – so more elastic than insulin but less than cigarettes. And for non-wage income it was 0.909. Although with non-wage income the genius decision not to lift the trust rate at the same time means it could be recharacterisation of the income rather than no longer earning it. 

And yeah I know I have mixed up demand and supply in the chat above but the guts is all the same. More inelastic the whatever is – if you impose a tax on it the lesser the behavioral change and the lower the deadweight cost.

Now the decision to talk about all this stuff dear readers isn’t just a mind w@nk on my part. Last week as you may remember the lovely Hon Steven announced that his benevolent government was planning to cut taxes through the increase in thresholds. Well only if you like vote them back in.  Coz its not like the red team will give it to you even if the green team voted for it …? Too hard for me. Think I’ll stick to tax.

So with $2 billion a year to spend – what are the efficiency gains/reduction in deadweight losses? Turning to the –  focus group named – line item Consequential Adjustments. Page 26. Nothing. There is a discussion of an increase in consumption and higher business profits coz people get more money to spend. But no actual mention of any increase to labour supply as a result. 

But looking at the RIS though page 28 – there is expected to be a 0.28% increase in labour supply aka reduction in deadweight cost from the package chosen.

Yep. 0.28%. Aka 0.0028. Not quite sure my aging focal length can pick up something so small.

But then that makes sense. The deadweight loss thing operates on the marginal rate and there wasn’t much of a change in all of this.

Now let’s all take a moment to think about what they could have done. Smooth out the tax and transfer interface. Here the effective marginal tax rates are pretty nasty. 

And with $2 billion a year to spend it wouldn’t have been too hard to have created quite meaningful efficiency gains from focussing on those. 

Then that really would have been a budget for low and middle income families.


Andrea

Two bills one week

Let’s talk about tax.

Or more particularly let’s talk about the two tax bills that were introduced this week.

Some time last century dear readers your correspondent was a junior accountant for an oil company in the UK. And in that company was a low cost petrol retailer. Now one day in the early nineties all staff – yes even the accountants – were called into some marketing meeting. Purpose of meeting was to explain some new wizard marketing strategy that we could all sing and dance around. 

But before that particular experience some faceless but well dressed consultant treated us to some research. It was on customer behaviour and why customers chose one petrol station over another. Riveting stuff.  And have to say the monthly accounts I would normally be doing at this time were starting to look pretty good.

Now pretty much like every consultant presentation I have sat through before or since – the insights were off the scale. People chose our petrol stations because of: location; retail stuff and coz we were cheap. Genius. Worth every penny. So glad they got the specialists in for that.

But then they dropped an actual knowledge bomb on my 25 year old self. As well as the blindingly obvious stuff – there was an actual true story group of customers that used our stations just because we said we were low cost. And for this group it didn’t actually matter whether we were low cost or not. Saying it was enough. Twenty five year old mind blown. The facts didn’t matter.

Now all of this came back to me this week with the Budget and the Family Incomes tax bill that was introduced and passed this week. A Budget that was for low and middle income families. Or as some commentators are dubbing it – a left wing budget.

Wow. Just wow. The facts still don’t matter.

Now it was Hon Steven’s big day out. Tax cuts for everyone!!! Just under 2 bill per year on tax cuts alone.  And while there was other stuff. Vast bulk of the cost comes from tax cuts. Not entirely sure that this was what JustSpeak had in mind with its #billionbetterthings strap line but I guess tax cuts is preferable to any more bloody prisons. 

And of course anything involving tax  – even adjusting thresholds rather than rates – means more money goes to higher earners. It just does. It’s just what happens when you play around with tax stuff rather than transfer stuff. Coz higher income earners are the people who pay are the people who pay most of the income tax for individuals. So any cuts in income tax go to those who pay the income tax. 

Oh and tax stuff applies to individuals not families. But I guess the clever Treasury people were able to turn this into a family costing below.

But then taking these lovely numbers and annualising them you get this:

Soooo families with incomes over $84k get half the dosh. Very progressive.

Even if those families didn’t actually want the princely sum of $35 per week and might have preferred it to go to mental health, or more state houses or more refugees. But at least it was only one new prison not three! #smallmercies.

But hey this is the party that has been elected. They can kinda do what they like. But a raid into Labour’s territory? Really? I guess if you say it often enough it must be true.

And then for comic relief was the political equivalent of a wardrobe malfunction. Hon Steven said that only one third of those eligible for IETC claimed it in a year rationalising its repeal. But then following questioning from the Michael Wood, Tim McIndoe kindly clarified that yes it was more 30% during the tax year and another 50% at the end of the year. Right ok. 80% not 30%.

And to be fair in the like actual Budget speech Hon Steven did say ‘during the tax year’. So not like actually lying.  And in reality more likely a mix up in the bureaucracy than any intention to mislead.

But to your correspondent Budget 2017 – whole thing – deeply underwhelming. Just hope they didn’t also waste money on consultants as well.

Now ironically there was another tax bill that was also introduced last week that actually was a raid into Labour’s territory.  Making everyone pay their fair share and all that. For top earners anyway. The Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill. Just trips off the tongue. And on the whole it is a standard dull but worthy tax bill. Except for Employee Share Schemes. A well buried piece of social justice aka base maintenance.

Now the commentary and the previous discussion document are eye wateringly technical. Even your correspondent struggled. But buried in the RIS – para 54 –  is the comment that it will raise $30 million a year. Now tiny in comparison to Steven’s big day out but quite a bit for a base maintenance item that deals with the taxation of remuneration. Especially since this is a net amount and there is an extension of a tax expenditure promoting widely offered share schemes. #workerparticipation.

Coz while yeah there are holes in the taxbase generally – all the remuneration stuff tends to be pretty water tight

It all seems to have started life with a Revenue Alert that the department issued in late 2015. There they set out two wheezes that quite honestly could really only be used by important and well remunerated employees. People for whom the top tax rate is pretty much their average top rate. Coz honestly what employer could be bothered going to this amount of effort for ordinary employees.

Now currently the law pretty much says that if employees get shares then the difference between their value and what they pay for them is income. Makes sense. 

But the Revenue Alert talks of a situation where:

  • An employee buys shares on day one for market value. Awesome no taxable income there. No transfer of value. Alg.
  • But they buy them with an interest free loan. Nah still cool. The value is in the interest free part and that is catered for by the Fringe Benefit Tax rules. 

Except the wheeze is that the loan can be fully repaid by just handing the shares back. Ahh wot?

So if the shares go up – the difference is an untaxed capital gain but if they go down – nowt. Mmm no. Now the lovely Commissioner has quite correctly said – yeah nah – tax avoidance. And coz this is all connected to employment is looking to tax the gain as remuneration. Yep with you there Mrs Commissioner.

Now applying the tax avoidance provision all over the place is no way to run a tax system. So Hon Judith’s bill applies if you buy shares from your employer but you aren’t subject to the risk of them declining in value – aka not held ‘at risk’. In those situations when you get actual value from the transaction – that value is taxable. You know kinda like how when you are on a promise for a bonus – when that bonus actually materialises it is taxable? Yeah just like that here too.

Now yeah what ‘at risk’ means might not be super clear but tax avoidance audits aren’t super fun either. And as my late dear friend Tim Edgar would have said – just stay away from the edge. Everyone else pays tax on gains from their employer – so should the employees whose employers can be bothered to do clever stuff for them. 

And this is what a socially progressive tax bill actually looks like. Hope it survives select committee.

Andrea

#shelterisforpeople

Let’s talk about tax.

Or more particularly let’s talk about the proposed Australian tax on under-utilised properties.

Now in New Zealand the big tax story is how Labour is planning to remove tax breaks from ‘speculators’.  Including the best headline ever – ‘Shelter is for people – not for tax‘. Great strap line. I can see the #shelterisforpeople hashtags and possible memes. And all because they are only planning to remove negative gearing.

Now negative gearing is a term used when losses – usually from interest – from renting out a property are deducted from other taxable income. Usually income from a day job. And this kinda is a standard feature of our tax system. All income is added together and then all deductions are offset and tax is paid on the balance. 

However with property a major form of income – capital gains  – is not included in the calculation. So this does give a degree of tax preference – or shelter – that ordinary businesses don’t get. Is it a loophole? Dunno. Not including capital gain definitely is a loophole. But really the only way interest should actually be allowed even with including capital gains  – is if they were taxed every year on an unrealised accrued basis. Now that would really be #shelterisforpeople.

And until that ever happens – no breath holding here – all that second order stuff like removing tax depreciation and negative gearing has a place. Such restrictions also probs still have merit with a realised capital gains tax as can be massive deferral benefits with that.  Remember how the retirement villages don’t ever sell?

And of course in all this #shelterisforpeople stuff around negative gearing there is no mention of the other real tax breaks of:

 And given the cr@p Labour is getting over this relatively mild proposal  – which will only move the tax system towards fairness a tiny bit – I can’t say I blame them. Working group I guess.

And into this mix comes the recent Australian proposals to tax ‘under-utilised’ housing of foreigners. The rhetoric behind it is to free up housing for Australians.  And I guess it comes off the reports of large scale empty properties in Sydney. Now recently I watched – with increasing horror – my son and his girlfriend both with incomes and references trying to find a flat in Manly.  So I am totes in support of that objective – so long as ‘Australians’ can be also read as bludging Kiwi students. Not entirely sure why it is targetted at foreigners though. Coz exactly why is the nationality of the landlord relevant when the problem is that a house is empty?

Now the actual plan is to impose the charge that is levied when foreigners get permission to buy property in the first place. AUD 5,000 for a property of less than AUD 1 mill and equivalently more thereafter. And much like the Inland Revenue restructure cleverer people than me will have come up with it; but here’s what I don’t get:

  • One. If someone is rich enough to own property and not need to rent it out then don’t ya think they can cope with an extra 5-10k expenditure?
  • Two. Collectability. Now I get that people will pay if it is the price of getting what they want. But how exactly is this going to be collected from people who have already got the right to buy a new property? And from foreigners who by definition don’t live in Australia much? How is this going to work exactly? There are collection clauses in some treaties but this won’t be a tax covered by them.

Now if this is a big problem such a corrective tax could be put into the mix. But then it needs to be:

  •  A tax that is penal. So people look to change their behaviour;
  • Applied to all under-utilised properties. Coz foreigners only is nuts; and
  • Deemed income tax so collection clauses in treaties can be used.

Now there is no mention of an equivalent policy in the Labour stuff. Maybe under-utilised property isn’t a big problem in New Zealand? Even if Gareth does have six. But much like the Bank Levy – let’s not blindly follow the Australians. If we want one let’s make it work.

Andrea

Do ron ron

Let’s talk about tax. 

Or more particularly let’s talk about the recent Australian transfer pricing case Chevron.

In a week when Inland Revenue announced a major restructure which will involve staff now needing ‘broad skill ranges’; it made me think of the type of work I used to do there – international tax. 

It was true that my job needed skills other than technical ones:

  • keeping your cool when being verbally attacked by the other side; 
  • being able to explain technical stuff to people ‘who don’t know anything about tax’ – aka anyone at Inland Revenue not in a direct tax technical function; 
  • ensuring the bright young ones got opportunities and didn’t get lost in the system; and 
  • generally ‘leveraging’ my networks to support those who were doing cutting edge stuff but not getting cut through doing things the ‘right’ way.

But otherwise what I did required a quite narrow specialised technical skill range. And that was good as it allowed me and my colleagues to focus on one particular area so we could be credible and effective. You know kinda like professional firms do?

As an aside I am not sure how this broad skill ranges thing ties in with the original business case – page 36 – which alluded to the workforce becoming more knowledge based. Coz knowledge-based work is kinda specialised not broad. But then the proposals are coming from a Commissioner who has a legal obligation to protect both the integrity of the tax system as well as the medium to long term sustainability of the department so I am sure she knows what she is doing. 

Wonder what the penalties are for breaching those provisions? But I digress.

Back to me. The international tax I did though was actually quite broad compared to the work my colleagues did in transfer pricing. That was eye wateringly specialised and quite rightly so. These were the girls and boys who were on the frontline with the real multinationals like Apple, Google, Uber and the like. 

And I was thinking of them recently when an appeal from an Australian transfer pricing case Chevron came out. Two wins to the Australian Commissioner and the Australian TP people – woop woo! Go them.

The guts of the case is that Chevron Australia set up a subsidiary in the US which borrowed money from third parties for – let us say – not very much and on lent it to Chevron Australia for – let us say – loads. And it was with a facility of 2.5 billion US dollars. Now you can kinda imagine the difference between not very much and loads on that was a f$cktonne of interest deductions – see why I get obsessed with interest  –  and therefore profit shifting from Australia to the US. 

Now even though it was a subsidiary of Chevron Australia; the Australian CFC rules don’t seem to apply to the US. Coz comparatively taxed country – thank god we don’t have those rules anymore. And the judgment says it wasn’t taxed in the US either. Didn’t spell out why but I am guessing as the Australian companies are Pty ones  – check the box stuff – they get grouped in the US somehow. No biggie for US but bucket loads less tax than they would otherwise pay in Australia.

And according to Chevron it was like totes legit. Coz loads is the market price for lots of really risky unsecured debt. I mean seriously dude like look up finance theory.

To which the seriously unbroad people in the Australian Tax Office said – yeah nah. Theory is like only part of it. The test is what would happen with an independent party in that situation. 

  • Option one – the seriously risky party ponies up with guarantees from those who aren’t seriously risky. You know how those millennials who buy houses and don’t eat smashed avocado do when their parents guarantee their loans? It is the same with big multinationals. 
  • Option two –  banks don’t lend. So just like for all the milennials who don’t own houses but who do eat smashed avocado and don’t have rich parents.

And the Australian court thought about it all – pointed at the unbroad public servants – and said:

What they said. Chevron you are talking b%llcocks. The arms length price is one an independent party like millennials would actually pay.  This includes guarantees and you price on those facts. Not the fantasy nonsense you are spouting.”

Well broadly. Actual wording may vary. Read the judgments.

Now these are seriously useful judgments – internationally – for the whole multinationals paying their fair share thing. Let’s just hope New Zealand keeps the people who can apply them.

Andrea

Cry me a river

Let’s talk about tax. Yes dear readers – tax. No prison reform no yoga stuff. Just nice emotionally simple tax.

Or more particularly let’s talk about the recent Australian Budget announcement of a levy on banks aka the Great Australian Bank Robbery.

Your correspondent has now completed her yoga teacher training and so is available for weddings, funerals and bar/bat mischvahs. Highlights of the course included injuring herself while dancing and getting zero on the first attempt on the final exam. 

It’s not like I haven’t failed things before but when the question was – reminiscent of the Peter Cook coal miners sketch – ‘who am I?‘ to fail – mmm – more than a little surreal. Now even the first time thought I had answered in a sufficiently right brained way  – lots of introspective emotion involving personal power and connection with others – aahhh no. 

But your correspondent is a resilient adaptive individual – even before the course – so regrouped with – ‘complete‘. 

90%. 

I couldn’t make this up. Subsequently found other correct answers included: me; enough – and my particular favourite – light. Ok right. Thanks for sharing. 

And it all really did make me crave balance. Which in my world after eight full days on yoga is the left-brained world of tax. I had planned to write about the Australian transfer pricing case Chevron but this week has been the Australian Budget with a big new tax on their banks. And as I have had a few questions on this and I am trying to be more topical – here we go:

Now the bank tax thing seems to be part of a package of the Australian government responding to the Australian banks bad – but probs more likely monopolistic – behaviour. Also potentially a political response to appointing a popular Labour Premier – and good god a woman – to be  head of the Bankers Association. And my word the banks must have been bad as they only found out about it on Budget Day and it starts on 1 July without – as far as I can see – any grandfathering. 

Wow. Just wow.

So what is it?

It is a levy on big banks liabilities that aren’t:

  • customer deposits or 
  • (tier 1) equity that doesn’t generate a tax deduction. 

It targets commercial bonds, hybrid instruments (tier 2 capital) and other instruments that smaller banks can’t access coz they are small. And as it will form part of the cost of this borrowing- under normal tax principles – the levy would be tax deductible. But even allowing for this tax deduction it is supposed to raise AUD 6.2 billion over four years. So not chump change.

What is its effect?

Now there can be no argument that the levy will effectively make such instruments more expensive to use. And here the public arguments get really sophisticated:

  • the Treasurer Scott Morrison (ScoMo) is telling banks to ‘cry me a river’ when they have expressed a degree of displeasure.

Awesome. Thanks for playing.

Corrective taxation

Now while this is predicted to raise revenue; it is by no means clear that this is its primary objective or even if it will occur. The reason being it only applies to big banks and to certain types of liabilities. To me this looks like a form of corrective tax like cigarette excise rather than a revenue raiser like an income or consumption tax like GST.

And much like a tax on cigarettes; pollution or congestion; this tax is 100% avoidable – legitimate tax avoidance even – by funding lending with an untaxed option like customer deposits. In theory anyway.  It is likely that banks will have maxxed out how much they can borrow from the public at existing interest rates. 

But with this extra tax; the relativities will change. Meaning there is now scope to pay more for the untaxed deposits but less than the tax if Banks want to maintain the same level of lending. Bank costs will still go up but through marginally higher deposit rates incentivised through the tax – rather than the tax itself.

In this scenario the Australian government still gets the costs of the higher interest deduction but not the revenue. But Australian savers win.

As the big banks are the dominant players in the market – this increase in interest rates for depositors will also impact the smaller banks as they will need to pay the higher rates to continue to attract depositors too. So no actual competitive pressure from the small banks and possibly less actual tax. Genius.

An alternative equally revenue enhancing scenario is that banks wind down assets – lending – and become smaller. Less lending but higher cost of borrowing if demand stays the same. 

Who bears the cost?

As they do in New Zealand anytime extra taxes are mooted; the Australian banks are arguing that these extra costs will be borne by borrowers. Now in a fully competitive market without barriers to entry  the more price dependent  – or elastic – the demand for loans is the more it will fall on the shareholders. But lending overall will fall with the imposition of a tax which in turn will have housing market impacts if fewer people can get a mortgage.

With barriers to entry – like hypothetically say banking regulation – they are already pricing to maximise their profit so I would be inclined to say it will also hit shareholders. And the fall in price of banking shares would indicate that is what shareholders think too.

Except that if deposit rates go up instead; the cost structure of the entire banking industry will go up. And if no tax is actually being paid but the cost is being transferred through higher deposit rates then the banking industry will have political cover to pass the cost on to borrowers.

Alternatives

Now if this schmoozle is all about the banks paying more tax then either a higher company tax rate on big banks or increasing the requirements for  non- interest bearing capital would have been far simpler. While the former is pretty transparent that it is a blatant tax grab from the banks; the latter less so. They both have the advantage though of ensuring tax can’t be opted out of as well as keeping the competitive pressure from the smaller banks.

But both would form part of the banks cost structure and so – depending on the pressure from the small banks and how elastic demand is  –  be passed on in some form to borrowers. However if the government really wanted only the shareholders to pay then a one- off windfall tax would be the way to do it.

Whether or not the banks  – and their shareholders – should actually be treated like this is another story. But Cry me a river ScoMo: at least be transparent and do it properly!

Other stuff

It goes without saying that this is truly cr@p process. All the detail seems to be in ScoMo’s press statement. Although – legislation by press statement  – is an unfortunate feature of Australian tax policy.

And as for the Malcolm Turnbull ‘other countries have it too’ argument. From what I can see this was to pay back the government for the bail outs they gave the banks over the GFC. While Australia does have deposit insurance I wasn’t aware of any like actual bailouts. 

It is though kinda reminiscent of the diverted profits tax which is also a targetted tax on a group of bad people. Except that might have a non-negative tax effect. Here we have –  to extent it is passed on in higher deposit rates – higher costs industry wide causing less, not more, tax paid by this industry. Let’s just hope for Australia’s sake the savers are not all in the tax free threshold.

So nicely done ScoMo and Big Malc. Possibly more Lavender Hill mob than Ronnie Biggs.  But much like the Australian fruit fly; keep it on your side on the Tasman. It makes even this revenue protective commentator blanch and our banking tax base can so do without it.

Andrea

Update

A commentator on the blog’s facebook page has suggested that this levy makes sense in terms of addressing the huge implicit subsidy that is the Australian deposit guarantee scheme. I have absolutely no issue with this being charged for in the form of a levy on the banks. Naively I would have thought that such a levy would then be based on the deposits covered by the guarantee not the liabilities that aren’t.  Apparently that’s not how Australian politics works!

The discussion can be found in the Facebook comments section for this post.

 

I am into champagne

Let’s (not) talk about tax.

Let’s talk about yoga stuff.

As part of her assessment for yoga teacher training your correspondent has had to read B K S Iyengar’s Light on Life and write 500 words on something that ‘spoke to me’. As 500 words is blog length and we have now all handed in our essays I thought I’d post it as a bit of ‘light’ relief after all the tax stuff. 

Think of it – dear readers – as the blog equivalent of alternate nostril breathing which is supposed to balance out the hemispheres of your brain. Although that exercise after a couple of rounds doesn’t so much balance out your left brained correspondent as make her want to run screaming from the room.  So like all yoga; work with your comfort levels and rest or stop when you need to. Listen to your body.

But first a bit of background. Yoga is not actually what non-yogis think it is. Non-yogis think of it in terms of contortionist poses – that they are like far too stiff or inflexible to do. And this isn’t helped by the whole instayogi thing. Beautiful fit young people doing postures average people can’t do on beaches or tropical islands that average people can’t afford to go to. 

There are 8 limbs of yoga: the postures or asanas are but one of them. And that not to under rate them. As an ex runner I would say: come for the flexibility; stay for the brain calming and inner peace.

I had hoped to work in the ideas of Marianne Elliott social activist and yoga teacher. In particular her framework for progressive social change which I have paraphrased (and adjusted slightly) as involving:

  • The official rules laws and structures we live by;
  • How we treat each other; and 
  • How we treat ourselves.

And it is in the latter that yoga is referenced. But the essay I have to write is very short and I didn’t start soon enough to do a decent job with both Marianne’s and Iyengar’s ideas. For people who are interested in this combination I would suggest reading direct from Marianne’s work and skipping the rest of this post.

And yes this will be the last non-tax post for a while. Yes it is a tax blog and I will return to tax stuff in a couple of weeks after my teacher training is over.

Andrea

“We have been asked to read Iyengar’s Light on Life and write about what spoke to us. It is fair to say that yoga has changed my life. But not in a way that is particularly obvious from the outside.

My family has REALLY BAD GENES meaning living as long as I would like may not be possible. So I have organised my life to ‘do something different’ when I turned 50. That ‘something different’ broadly is working for progressive social change.

So this was in my head reading Light of Life. To be fair while I struggled with the book; there were a few things that really did resonate with me:

Role of asana

Iyengar says that asana is the physical process that relaxes the mind which in turn allows pranayama – breathing – to unlock the prana – energy – blockages in the body. Which in turn calms and focuses the mind.(Page 14)

This is absolutely my experience. In the time leading up to my fiftieth birthday I had many competing ideas and emotions. Normally would rush to decisions that may or may not be the right ones for me and those around me. 

Now it was my physical yoga practice that I kept coming back to. It might have sorted out my posture but more importantly it kept my mind clear and proceeding with calmness and focus.

I am a little nervous though of his concept of right pain as a tool for growth (page 49). As what I had thought to be ‘right pain’ in chaturanga has lead to a shoulder I am still trying to fix a year later.

Asteya and Aparigahaha

Non-stealing and non-covetousness like non-violence ahimsa, are tenets that are blindingly obvious ones for any philosophy. Iyengar, however, takes them further than I have seen before.

Non-stealing includes not taking more than you need. When combined with non-covetousness this means that taking more than you need could mean deprivation for others. And to Iyengar wealth being tied up in a few hands is also theft or covetousness.

To be faithful to these yamas wealth – as energy – must circulate otherwise ‘it will stagnate and poison us’. ‘Energy needs to flow or its source withers.’ (Page 245) This particularly resonated with me given according to Oxfam 8 men have as much wealth as half the world

What I am increasingly seeing in New Zealand – through our out-of-whack property market – is wealth being captured through those that own property from those that don’t.  And so by capturing all the wealth we are poisoning our children’s potential to live the lives we have lead.

But here’s the thing. Those who have the most won’t let that happen to their children. So opportunity and material comfort will only be available to the children of families that already have it. The exact social ill that families such as mine were escaping 100 years ago by coming to New Zealand.

So although Iyengar’s primary message was of one of inner freedom – embedded in that was the other eternal truth – that the personal is political.”

Moral and fiscal failure – take two

Let’s (not) talk about tax.

Let’s talk about the announcement of the new prison.

While your correspondent has been neglecting you dear readers – she has been heavily involved in writing this report.


It is – I hope – a relatively easy read. 

Wellington peeps we are talking about it tomorrow at the Fabians. Please come.

Andrea

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