Let’s talk about tax.
Or more particularly let’s talk about Oxfam’s recent press release on inequality and tax.
Now dear readers when I moved to weekly – hah – posting it was because this blog was supposed to be my methadone programme. Getting me off tax and on to other issues. So when I posted last night – after having posted 3 times last week – I gave myself a good talking to. This had to stop. One post a week was quite enough to keep the cravings at bay. To continue in this vein would risk a relapse.
But this morning while I was getting dressed my husband came and turned on the radio. Rachel LeMesurier from Oxfam was talking about inequality and then she talked about tax and then Stephen Joyce came on and then he talked about tax and then he talked about BEPS.
Just one more little post won’t hurt I am sure and I’ll cut down next week honest.
Oxfam has compared the wealth of 2 New Zealand men Graham Hart and Richard Chandler to the bottom 30% of all adult New Zealanders. Now the inclusion of Richard Chandler seems to be a rhetorical device as from what I can tell he hasn’t lived here since 2006. So very unlikely to be resident for tax purposes.
In the interview Rachael Le M also made reference to the tax loopholes that support such wealth. So using what is public information about Graham Hart and what is public about the tax rules I thought I’d make a stab at setting out what these ‘loopholes’ are.
Now first dear readers please put out of your head anything you have heard about BEPS or diverted profit tax or any of the ways that the nasty multinationals don’t ‘pay their fair share of tax.’ None and I repeat none of this is relevant when dealing with our own people. It might be relevant for the countries they deal with but not for New Zealand. I am hoping that officials will also explain this to new MoF Steven Joyce as when he came on to reply to Rachael – he talked all about BEPS. Face palm.
Graham Hart is a serial business owner. Buying them sorting them out and then selling off the bits he doesn’t want all with a view to building up a Packaging empire. A Rank Group Debt google search also indicates that a substantial proportion of all this buying and selling was done through debt. And at times quite low quality debt which would indicate a proportionately higher interest rate. A number of his businesses are offshore.
So then what ‘loopholes’ – or gaps intended by Parliament – could Mr Hart be exploiting?
The first and most obvious one is that there is unlikely to be any tax on any of the gains made each time he sold an asset or business. The timeframes and lack of a particular pattern – as much as Dr Google can tell me – would indicate that the gains would not be taxable.
The second is that income from the active foreign businesses will be tax exempt and any dividends paid back to a New Zealand will also not be taxed. Trust me on this. I’ll take you all through this another day.
The third relates to debt. Even though it assists in the generation of capital gains and/or the exempt foreign income it will be fully deductible. Now because of the exempt foreign income there will potentially be interest restrictions if the debt of the NZ group exceeds 75% of the value of the assets. A restriction true but not an excessive one given exempt income is being earned.
Now also in Oxfam’s press statement is a reference to a third of HWIs not paying the top tax rate. I am guessing some version of one and three plus the ability to use losses from past business failures is the reason.
Unsurprisingly Eric Crampton of the New Zealand Institute is not sympathetic to Oxfam’s views and points to our housing market as the main driver of inequality. So then in terms of tax and housing the other tax ‘loophole’ then would be the exclusion of imputed rents from the tax base.
Now one answer could be Gareth’s proposal. That is if someone could explain to me how to tax ‘productive capital as measured in the capital account of the National Income Accounts’ in a world where tax is based on financial accounts according to NZIFRS.
The second could be a capital gains tax even on realisation and the third some form interest restriction or clawback when a capital gain is realised. Oh and taxing imputed rents.
How politically palatable is this? Not very given National, Labour, Act, New Zealand First and United Future are all opposed to a capital gains tax – at least Labour for their first term.
But then maybe it is stuff for Labour’s working group. Will be interested to see this all play out.
I agree this is tricky and the net equity tax is easiest thought of as applying only to residential proeprty. But businesses own property and that creates a possible loophole – why not borrow against your home and invest in a business and take tax-free profits on sale? When a business is sold- like Gareth’s KiwiSaver, and Superlife that made a cool $10m for each of the directors from memory-could that be caught by treating the gain as personal income….. I realise this is tricky
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I agree it works beautifully for borrowed against property or where there is no debt.
And what you described about borrowing against your home for a business is bog standard. Not tax avoidance- however defined- and would continue even with a CGT.
Depending on how the CGT was done there may not be any difference whether it is treated as a taxable gain or personal services income.
But I agree it feels like personal services income ESP if business built up thru the directors effort.
Andrea, obsessive is fine especially about tax. I agree that salary sacrifice is now a thing of the past but wealthy retired people can put all their financial assets into PIEs including some on cash accounts- that saves 5% of tax on income earned from assets . Even better they can write down their PIE rate to 17.5% by diverting enough income ( apart from NZS) to PIEs.
Taxing net equity in property is the way to go and getting rid of or looking through the PIE regime
then can we talk about better designed tax credits to address the very flat tax structure and high GST on everything ?
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Hi Andrea – I wasn’t aware you had an issue with assessing the return on capital for businesses. They have balance sheets, those state what their assets are (at depreciated or written down values). What’s the issue?
Hi Gareth. They do have those on their balance sheets that is true but they also have claims against them in terms of debt, provisions and other accruals. I struggle to see how to isolate the ‘equity’ part of productive assets when the balance sheet is a global concept. Ie the debt, provisions and other accruals are as much a ‘charge’ on the excluded financial assets as they are the productive assets.
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