Author Archive: Andrea Black

Emissions, Feebates and Fringe Benefit Tax

This week the Government released a discussion document on a form of emissions pricing for new and imported vehicles. Pretty much on cue the opponents were railing against this ‘tax’ thereby bringing it into scope for this blog.(1)

[The reason for the badly drawn boxes will become clear in a bit. I can assure the Leader of the Opposition that they have nothing to do with poor graphic design on the part of the National Party Research Unit.]

The idea is that heavy emitting vehicles would pay a charge and low emitting vehicles would get a subsidy. While they were aimed to broadly net off there is likely to be a net cost which the Government will need to appropriate as a reserve fund to keep it all moving (2).

As an aside my former tax policy self can’t help feeling what is proposed in the discussion document is all a bit technically perfect and could possibly be simplified without losing too many of the behavioural benefits. (3)

But implicit in all of this is that there is some sort of market failure or unpriced externality as New Zealanders, more than other countries, seemed to value a low capital cost highly even if it involved higher running costs.

I guess then in a ‘if you can’t beat them join them approach’ the deal is that the government will marginally bring down the capital cost of low emitting, low running cost vehicles. Giving net benefits of between $111 and $821 million being largely a reduction in fuel costs from people driving more fuel efficient cars.

I haven’t fully nailed this yet as conceptually on an npv basis if low emitting cars have lower running costs the net benefits should stand on their own without government intervention. So I am wondering if there is something in a lack of personal savings to fund the higher capital cost or a bias against potential loss of value v operating costs that is influencing these decisions. (4)

Regardless it seems to be a microcosm of the environmental tax proposals in the Tax Working Group. There the proposals were that any money raised from additional taxation was used to fund the transition to greater environmental sustainability. (5)

As here it was a bit loose. Revenue recycling was the term used rather than hypothecation as it gave the Government the ability to also put money into any transition programme and so not be constrained by the funds actually raised.

And much like most of the environmental proposals in the TWG report – behavioural benefits are the name of the game. Rather than revenue raising.

And much like all behavioural taxation and subsidies – whether they have any actual effect will depend on the elasticity of demand for such vehicles (6). Because if demand is:

  • Very elastic – price sensitive – the $8000 benefit v $3000 cost will see a massive swing away from high emitting to low emitting vehicles. There will be no revenue raised and it will cost the Government a packet.
  • Elastic ish – it will have an effect but there will still be high emitting cars purchased. This is useful if the Government wants minimise it’s contribution to the overall cost.
  • Inelastic – price insensitive – there will be little or no change as people love their big emitting cars. On that basis it would start to become more like tobacco excise and become a good little earner for the Government. For the planet – not so much.

Now in the cabinet paper there is a list of other complementary things the government is doing (7). But curiously there is nothing on tax other than the RIS correctly ruling out a GST exemption for electric cars. Maybe it was because the Ministry didn’t consult with Inland Revenue (8) as I would have hoped the Department could have explained to them how environmentally unneutral fringe benefit tax (FBT) is.

Fringe benefit tax and the environment

The deal with fringe benefit tax is it taxes fringe benefits – such as ‘free’ cars or cheap loans – given to employees. The idea is that then there will be a tax level playing field to receiving cash wages and non-cash fringe benefits such as cars. FBT is an OG promoter of tax fairness as non-cash benefits are more likely to be given to higher income people.

However for completely unintentional reasons, in two ways, this tax could be incentivising the wrong things from an environmental perspective.

Carparks v public transport

The first is there is effectively no fringe benefit tax on the employer provision of car parks. This arises initially through an explicit exemption for any benefits provided on the employer’s premises.

The employer’s premises exemption make sense for compliance cost reasons as how do you work out the value of a benefit that is all part of the employer’s cost of running the business. So seems fair enough.

But when this meets car parks, the Department’s interpretation is that any leased land forms part of an employer’s premises.

And guess what – carparks are now all leased. Who would have thought!

There have been at least two attempts – one under Michael Cullen and another under Bill English – to legislatively remove this exemption. Both failed.

So rather than get on that horse again – as part of its environmental work – the TWG recommended that the government consider also removing FBT from the provision of public transport (9). To level the environmental – if not the tax – playing field.

Double cab utes and the work related vehicle

The second relates to double cab utes and the work related vehicle exclusion. See I told you my vandalising of the National Party’s work would become relevant.

[TL:DR The vandalised pictures would all meet definition of a work related vehicle – if signwritten – and be exempt from fringe benefit tax.]

A bit like the on premises exemption for car parks, there is also an exemption for work related vehicles. Again that makes sense for compliance cost reasons as there is not much private value from getting to take a work ute home.

In the late 80’s when I worked for a Chartered Accountant, the rules around work related vehicle were that it needed to be signwritten and it needed to have the back seats taken out of any vehicle that had more than two seats. I have very strong memories of the partner I worked for arguing with clients about how non negotiable both requirements were.

Now the rules seem to be that the vehicle is not ‘designed mainly to carry people’. (10)

I have been told that some time in the early 90’s the Department’s interpretation of this went from ‘take out the back seats’ to ‘double cab utes ok’.

Now for a sole operator tradie the need for the back seats may be a bit of a stretch as a requirement for a work related vehicle but is arguably ok. However I seriously struggle with a shareholder employee that runs the office and does the books having an FBT exempt dual cab ute. And yet that is exactly what is possible and completely legal.

All costs of the vehicle are tax deductible if the employer is a company and no FBT is payable.

So until there is a change to this I would suggest that the $3000 will simply be paid as it is less than the possible FBT that would otherwise be paid (11). In fact assuming no actual work related use or employee related expenditure any double cab ute that costs more than $31,000 it would make sense to just pay the $3,000. (12)

So may be this is revenue raising after all?

Andrea


(1) Long term readers will know this is nonsense as I will write on anything that spins my wheels.

(2) Paragraph 141 of Cabinet Paper.

(3) My former tax policy self also couldn’t help noticing options that looked awfully like tax pooling. The firms who offer that must currently be creaming it given the recent use of money interest rates. But that is a story for another day.

(4) Strictly speaking income tax also shouldn’t be a thing here as operating costs are tax deductible as is any interest expense and the capital cost is depreciable over time. It might conceptually be possible that the tax depreciation understates the actual depreciation but at 30% DV/21% straight line it doesn’t feel material or likely.

(5) Page 53 Paragraph 127

(6) Elasticity of supply will also feature in the final outcomes. If there is any form of constrained or monopolistic supply then the benefits could be absorbed by the supplier but with the costs passed on to consumer.

(7) Paragraph 35

(8) Paragraph 126

(9) Recommendation 18

(10) Section CX 38 of Income Tax Act 2007 and definition of car.

(11) 49.25% of 20% of cost price at say $45000 is FBT foregone of about $4.5k.

(12) Working backwards to a FBT cost of $3000, gives about $30,500.

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Other capital taxes – what are the options?

Last Thursday I had the very great pleasure of talking about tax to smart young people – here and here – at the Social Change Collective alongside Marjan van den Belt and Max Rashbrooke.

One of the questions was if not CGT and we wanted to tax capital more – what are the options? Answered it on the night but as the sharing individual I am I thought I’d do it for you all too.

This version might even be more coherent. Fingers crossed.

To me the options seem to be:

  • Net equity tax or risk free rate of return method (rfrm)
  • Wealth tax
  • Alternative minimum tax
  • Land tax

Net equity tax / risk free rate of return method

Susan St John is proposing the net equity tax – or risk free rate of return method for residential property.

This means a notional rate comparable to that a risk free rate of return – say 5 year bank term deposit – is applied to the equity held in residential property. This amount then becomes the income that is subject to tax.

For example if a property has a value of $1million – land $800k building $200k – but has a mortgage of $600k – it has net equity of $400k.

If a rate of return of say 3% is applied to the equity of $400k this will generate taxable income of $12,000. This $12k would then be taxed at the tax rate that applies to that particular taxpayer. Say 33% if top rate individual or trust. 28% if a company.

This $12k would replace any existing taxable income from that asset. That is rent would no longer be taxable and so there would be no associated deductions allowed.

As Susan is only proposing that it apply to residential property there would be no particular problems with getting a valuation to work out ‘net equity’ as land is regularly valued.

There could be issues if the debt that is attached to a property funded other investments and not the property itself. However there are lots of issues with debt and how it is allocated generally – I don’t think that is a deal breaker here.

There are also the issues that I raised in my comments on the officials note. For landlords who are currently charging below market rent this may incentivise rent increases. It may also further disincentivise landlords maintaining their properties as there is no tax benefit for doing so.

However that is more the place of regulation rather than tax.

Interim conclusion: Some technical issues with debt allocation and possible adverse behavioural effects by landlords but quite doable. No issues with valuation.

Wealth tax

Max Rashbrooke is proposing a wealth tax on all wealth.

An annual tax of a small percentage of the value of wealth held. As per the previous example – assuming no other wealth was held by the taxpayer – a small percentage – say 1/2% would apply to the $400k and an extra $2000 wealth tax would be payable on top of any other existing taxation.

Unlike net equity tax, this is not a proxy or an alternative calculation of taxable income for income tax to apply to. It is an additional tax on a different base in the same way GST is.

And just like GST it is a form of double tax. Consumption – and GST – is made from tax paid income. That is the same income is taxed twice. It is a feature. The beauty of GST is can also ensure one level of tax is paid when income wasn’t taxed in first place. Say if an untaxed capital gain.

Wealth taxes are similar. If tax has been paid at every level we would get:

  • 1) Original wealth coming from unconsumed tax paid income (current situation) A
  • 2) Investment return on wealth taxed (current situation) B
  • 3) Total wealth A plus B subject to wealth tax (new situation with wealth tax)
  • 4) Wealth if consumed – subject to GST (current situation)
  • For some asset classes such as bank deposits – or possibly foreign shares – this is absolutely the deal as there is no part of the income that is untaxed. In those cases wealth tax seems a bit like over kill/taxation.

    For other classes such as shares, investment in small businesses and unleveraged residential rental property where some part of the return is taxed but there is still an element of untaxed capital gain – depending on the rate of tax – a wealth tax absolutely has merit.

    For serial entrepreneurship or land banking where the whole return is a capital gain – in a world without the capital gain taxed – this is an absolutely bang on approach.

    Assuming this can be got through – maybe with different rates for different types of wealth although that will then bring in issues of debt allocation – the most significant issue will be that of valuation.

    This is particularly the case with valuing goodwill in unlisted businesses. To have to value every year would make the valuation industry very rich.

    Now I know it is possible for the tax administration to come up with some rules of thumb but having been upclose and personal in the Michael Cullen/Troy Bowker spat on exactly this issue – it is definitely a practical thing that will slow this option down.

    Interim conclusion: Need to clarify conceptual basis for including asset classes already fully taxed. Valuation issues likely to be a significant hurdle in practice. But could work.

    Alternative minimum tax

    Geoff Simmons and TOP are proposing an alternative minimum tax on all wealth. A bit like Susan’s proposal but instead of the rate being applied to residential property it would apply to all the wealth of a taxpayer.

    But unlike Susan’s option, instead of the rfrm number becoming the taxable income figure it would be compared to the taxable income that arises under the current tax rules. Tax would then be payable on the higher of the two numbers.

    So in our example above if the property was the only source of wealth and currently returned no taxable income, then the $12,000 would be taxed at whatever the appropriate tax scale is.

    However by including all wealth this option suffers from the same valuation issues as a wealth tax.

    But because it calculates an alternative minimum income level, rather than an additional or alternative tax, there is no issue of double or triple taxation. Its aim is to simply ensure the income that level of wealth should (or is on an imputed basis) be generating is subject to tax at normal rates.

    Interim conclusion: Conceptually the most coherent of all the options but significant issues with valuation. Could work though.

    Land tax

    This would involve an annual tax of a small percentage of the value of land held. Like a wealth tax it would be a separate and additional tax but unlike a wealth tax it is levied on the value of the land – in this case $800k – with no reference to the debt borrowed to purchase it.

    By focussing on land it doesn’t have the valuation issues that a wealth tax or an alternative minimum tax does. Also there are no issues with allocating debt.

    It does, however, seem arbitrary to pick on one asset class only. But as this is the asset class that is currently undertaxed by reference to the level of capital gains earned (1)- such an argument doesn’t stress me.

    It is, though, the current tax base of local authorities so if central government were to move into their tax base, local authorities’ arguments for a portion of GST could become more compelling.

    Interim conclusion: Conceptually the least coherent of all the options. Minimal practical issues. Could definitely work.

    The key difference between all these options is that a land or wealth tax is an additional tax separate to income tax. Net equity or alternative minimum taxes, however, are still within the income tax system but trying to get a better measure of taxable income than the status quo.

    But they have many more things in common.

    Similarities between the options

    Thresholds

    I think all options will need some form of threshold before they apply. No one – thank goodness – is keen on a family home exclusion. But all have additional complexity and compliance cost so something like $500k threshold for an individual could take out personal assets including a home (and maybe KiwiSaver) for most people. This would then mean the taxes could focus on the top end of the income and/or wealth scale.

    May not have cash to pay the tax

    None of these options are realisation based. That is they apply irrespective of whether any cash – or income other than imputed income – has been generated from the assets or wealth. Now I know that Susan St John explicitly doesn’t care about that as she feels then the property should be sold if that is a problem for the owner. I am guessing that is also the view of TOP as it is only cash poor pensioners that can get any deferral.

    I get why economists might not care about this and/or see it as a design feature to encourage more efficient use of assets but not sure that is how the general public would see it. Even with a threshold.

    As an example the Tax Working Group only considered rfrm on residential rental properties as it was only that group that would have the cash to pay it.

    Impact on Māori collectively owned assets

    Māori currently own a tiny fraction of the land they did at the time of the signing of Te Tiriti. And the settlements they have received were only 2% or so of the value they lost through crown action. (2)

    Now the deal with the settlements was that they were to be full and final and that there are no special tax rules. But any tax isn’t linked to cash income earned and targets their assets or wealth, even if not the basis of a potential contemporary Waitangi Tribunal case, will be considered more bad faith action from the Crown.

    As a woke Wellington snowflake I would have no problem exempting assets held collectively under a Māori Authority. Not for tax policy reasons but as a way of preventing further injustice. But as the equivalent noise showed with capital gains, this would not be a universal view.

    Would raise shed loads of money

    Rfrm on residential rental property only was found to raise a $1 billion (3) a year more than the current taxation of residential rental property. This was even when the extension of the brightline test to 5 years and loss ringfencing was allowed for. That was with a rate of 3.5% which was the 5 year bank term deposit rate at the time of the report.

    $1 billion. Every year.

    Let that sink in.

    Final conclusion on all options

    So all options even with quite modest rates could raise seriously useful dosh for the Government.

    But this money wouldn’t come from thin air. Like capital gains it comes from people of means. A section of whom – much like with capital gains – are well organised, connected and resourced.

    So I am not holding my breath for any of these being adopted by a major party any time soon. No matter their merit.

    Andrea


    (1) Paragraph 60.

    (2) For readers interested in more background. Here is the officials paper on the subject for TWG and here is mine as I didn’t feel officials went far enough.

    (3) Paragraph 41

    Taxing multinationals (3) – Digital Services Tax

    I had thought this might be a good post for my young friends to sub in on. But quite quickly into the conversation it became clear there would need to be too many ‘but Andrea says’ interjections to make it technically right. So we decided that I should go it alone.

    Background

    Now first of all the whole making multinationals pay tax thing is a bit of a comms mess so I thought I’d have a go at unpicking it.

    The underlying public concern was, and is, based around large – often multinational – companies not paying enough tax. A recent article on my Twitter feed on Amazon earning $11.2 billion but paying no tax is pretty representative of the underlying concern.

    Technically there were/are two reasons for this:

    1) The ability to earn income without physically being in the country you earn the money from. This is primarily the digital issue.

    2) Arbitraging and finding their way through different countries rules to overall lower tax paid worldwide. This is primarily an issue with foreign investment as such techniques really only worked with locally resident companies or branches.

    In terms of the OECD work while it was 1) that kicked off the work – most of their action points have previously related to 2). That is – the base erosion part of base erosion and profit shifting.

    In New Zealand there was a 2017 discussion document that was advanced by Judith Collins and Steven Joyce on the New Zealand specific bits of 2) which was then picked up and implemented by Stuart Nash and Grant Robertson.

    And while the speech read by Michael Wood after Speaker Trevor got upset with Stuart for sitting down opens with a discussion of ‘the digital issue’, the bill was about increasing the taxation of foreign investment – ie 2) – not the tech giants. (1)

    Current NZ proposal

    Now Ministers Robertson and Nash have issued a discussion document proposing – maybe – a digital services tax if the OECD doesn’t get its act together.

    Before we go any further one very key aspect here is the potential revenue to be raised. $30- $80 million dollars a year.

    Now that may seem like a lot of money – and of course it is – but not really in tax terms. As a comparison $30 million was the projected revenue from a change to the employee shares schemes. Only insiders and my dedicated readers would even have been aware of this.

    Now given the public concern and the size of the tech giants – with $30 million projected revenue – I would say either there really isn’t a problem or the base is wrong.

    So what is the base? What is it that this tax will apply to?

    Much like the Michael Wood/Stuart Nash speech, the problem is set out to be broad – digital economy including ecommerce (2) but then the proposed solution is narrow – digital services which rely on the participation of their user base (3).

    This tax will apply to situations where the user is seen to be creating value for the company but this value is not taxed. The examples given are the content provided for YouTube and Facebook , the network effects of Google or the intermediation platforms of Uber and AirBnB.

    And because of this, the base for the tax is the advertising revenue and fees charged for the intermediation services. Contrary to what the Prime Minister indicated it will not be taxing the underlying goods or services (4). It will tax the service fee of the Air BnB but not the AirBnB itself. That is already subject to tax. Well legislatively anyway.

    There are some clever things in the design as, to ensure it doesn’t fall foul of WTO obligations, it applies to both foreign and New Zealand providers of such services. But then sets a de minimis such that only foreign providers are caught (5).

    Officials – respect.

    But then it takes this base and applies a 2-3% charge and gets $30 million. Right. Hardly seems worth it for all the anguish, compliance cost and risk of outsider status.

    The other issue that seems to be missing is recognition of the value being provided to the user with the provision of a free search engine, networking sites, or email. In such cases while the user does provide value to the business in the form of their data, the user gets value back in the form of a free service.

    For the business it is largely a wash. They get the value of the data but bear the cost of providing the service. That is there is no net value obtained by the business. (6)

    For the individual the way the tax system works is that private costs are non deductible but private income is taxable. Yep that is assymetric but without assymetries there isn’t a tax base.

    In some ways this free service is analogous to the free rent that home owners with no mortgage get – aka an imputed rent and the associated arguments for taxing it. That is the paying of rent is not deductible but the receipt of rent should be taxable.

    Under this argument it is the user that should be paying tax on the value that has been transferred to them via the free service not the business. While I think the correct way to conceptualise digital businesses, taxing users is as likely as imputed rents becoming taxable.

    But key thing is that the tax base is quite narrow and doesn’t pick up income from the sale or provision of goods and services from suppliers such as Apple, Amazon and Netflix. None of this is necessarily wrong as there has never been taxation on the simple sale of goods but it is a stretch to say this will meet the publics demand for the multinationals to pay more tax.

    And it is true such sales are subject to GST but last time I looked GST was paid by the consumer not the business.

    Technically there are also a number of issues.

    The tax won’t be creditable in the residence country because it is more of a tariff than an income tax hence the concern with the WTO. It is also a poster child for high trust tax collecting as the company liable for the tax by definition has no presence in New Zealand and it is also reliant on the ultimate parent’s financial accounts for information.

    This is all before you get to other countries seeing the tax as inherently illegitimate and risking retaliation.

    OECD proposals

    The alternative to this is what is going on at the OECD.

    They have divided their work into 2 pillars.

    Pillar one

    Pillar one is about extending the traditional ideas of nexus or permanent establishment to include other forms of value creation.

    The first proposal in this pillar is to use user contribution as a taxing right. It is similar to the base used for the digital services tax and faces the same conceptual difficulty – imho – with the value provided to users.

    However unlike the DST it would be knitted into the international framework, be reciprocal and there would/should be no risk of retaliation or double taxation.

    The second proposal is to extend a taxing right based on the marketing intangibles created in the user or market country. The whole concept of a marketing intangible is one I struggle with. Broadly it seems to be the value created for the company – such as customer lists or contribution to the international vibe of the product – from marketing done in the source/user/market jurisdiction.

    This is a whole lot broader than the user contribution idea and has nothing really to do with the digital economy – other than it includes the digital economy.

    Some commentators have suggested it is a negotiating position of the US. Robin Oliver has suggested that the US seems to be saying – if you tax Google we’ll tax BMW. In NZ what this would mean is that if we could tax Google more then China could tax Fonterra more based on marketing in China that supported the Anchor brand.

    Both options explicitly exclude taxation on the basis of sales of goods or services (7).

    There is a third option under this option pithily known as the significant economic presence proposal. The Ministers discussion document describes it essentially as a form of formulary apportionment that could be an equal weighting of sales, assets and employees. (8) Now that sounds quite cool.

    I do wonder whether it would also be reasonable to include capital in such an equation as no business can survive without an equity base.

    In the OECD discussion document they state that while revenue is a key factor it also needs one or more other things like after sales service in the market jurisdiction, volume of digital content, responsibility for final delivery or goods (9). Such tests should catch Apple and Amazon in Australia as they have a warehouse there but they are likely to be caught already with the extension of the permanent establishment rules.

    It is less clear whether this would mean New Zealand could tax a portion of their profits but if that is what is wanted – this seems the best option as it is getting much closer to a form of formulary apportionment.

    Pillar two

    The other pillar – Pillar 2 – sets up a form of minimum taxation either for a parent when a subsidiary company has a low effective tax rate or when payments are made to associated companies with low effective tax rates. Again much broader than just the digital economy and similar to what I suggested a million years ago as an alternative to complaining about tax havens.

    For high tax parents with low tax subsidiaries this is effectively an extension of the controlled foreign company rules and would bring in something like a blacklist where there could be full accrual taxation or just taxation up to the ordained minimum rate.

    For high tax subsidiaries making payments to low tax sister or holding companies, they have the option of either denying a tax deduction for the payment or imposing a withholding tax. This could be useful in cases where royalties and the like are going to companies with low effective tax rates. On the face of it, it could also apply to payments for goods and services made by subsidiary companies.

    It might also be effective against stories of Amazon not paying any tax – as zero is a pretty low effective tax rate.

    The underlying technology seems to be based on the hybrid mismatch rules which also had an income inclusion and a deduction denial rule. Such rules were ultimately aimed at changing tax behaviour rather than explicitly collecting revenue.

    Pillar 2 seems similar. If there will be clawing back of under taxation it is better to have no under taxation in the first place. So it may mean the US starts taxing more rather than subsidiary companies paying more tax.

    Pillar 2 by being based around payments within a group will have no effect when there is no branch or subsidiary as is often the case with the cross border sale of goods and services to individuals .

    My plea

    Now the reason for all this work – both the DST and the OECD – is the issue of tax fairness and the public’s perception of fairness.

    DST – imho – is really not worth it. All that risk for $30 million per year. No thank you.

    But it has come about because even after the BEPS changes they still aren’t catching the underlying concern of the public – the lack of tax paid by the tech giants.

    And there is no subtlety to that concern. In all my discussions no one is separating Apple, Amazon and Netflix from Google, Facebook and YouTube.

    But it is time to be honest.

    There are good reasons for that distinction. NZ is a small vulnerable net exporting country. Our exporters may also find themselves on the sharp end of any broader extension of taxation.

    So policy makers please stop asserting the problem is the entire digital economy and then move straight to a technical discussion of a narrow solution without explaining why.

    It gives the impression that more is being done than actually is. And quite frankly this will bite you on the bum when people realise what is actually going on.

    And front footing an issue is Comms 101 after all.

    Andrea


    (1) To be fair that bill did also include a diverted profits tax light which was directed at the likes of Facebook who just do ‘sales support’ in New Zealand rather than full on sales. But that was a very minor part of the bill.

    (2) Paragraphs 1.2-1.4

    (3) Paragraphs 1.5 onwards

    (4) I had a link for her press conference but it has been taken down. She suggested that it was only fair that if motels in NZ paid tax so should AirBnBs. I completely agree but the AirBnBs are already in the tax base and if they aren’t currently paying tax that is an enforcement issue not a DST issue.

    (5) Paragraph 3.24

    (6) Paragraph 60 of the OECD interim report also notes this issue.

    (7) Paragraph 67

    (8) Paragraph 4.47

    (9) Paragraph 51

    PIEs, timebar and tax fairness

    My lovely young friends had a great time with their guest post last week and were delighted with the reception they received. Including getting picked up by interest.co.nz – something they like to point out I have never managed.

    They were really keen to post this week on the digital services tax discussion document which they think is awesome. But I need to have a little chat to them before they do.

    We also had a chat about whether the Andrea Tax Party is really a goer. Much like Alfred Ngaro we have concluded it all seems a bit hard. Also the move from thinking about things to politics hasn’t been the smoothest for TOP. So as the evidence led people that we are, we have decided to conserve our emotional energy and not fall out over boring constitutional issues.

    I’ll stay as your correspondent and my young friends will come back from time to time when they can fit it in between their three jobs and studying. They are also checking out Organise Aotearoa who recently put up this sign in Auckland and seem to be to the left of Tax Justice Aotearoa.

    As well as the digital services tax proposal – which I’ll save for my (briefed) young friends – the other tax story this week was how thanks to the Department upgrading its computer system it has found a number of people – 450,000 – haven’t been paying enough tax on their PIE investments. And while that is the case the Department has said that it won’t chase this tax on any past years.

    Behind this story are two interesting – to me anyway – tax concepts.

    Portfolio investment entities (PIEs)

    These are a Michael Cullen special and came in at the same time as KiwiSaver. Before their introduction all managed funds were taxed at the trust rate of 33% and were taxed on any gains they made on shares sales – because they were in business.

    Alongside all this was passive investment or index funds who had managed to convince Inland Revenue that because they only sold because they had to, those gains weren’t taxable.

    Individual investors weren’t taxed on their capital gains and otherwise they were taxed at less than 33% if they had taxable income below the 33% threshold. This was particularly the case for retired investors.

    The status quo did though give a minor tax benefit to high income people who were otherwise paying tax at 39%.

    So it was all a bit of a hot mess.

    Added into the equation was that, unlike now, the Department’s computer wasn’t up to much so all policy was based on ‘keeping people out of the system’.

    So where the PIE stuff landed was income of the fund would be broken up in terms of who owned it and taxed at the rate of the owners. Except for the high earners – as their alternative was a unit trust taxed at the company rate – the top rate was capped at the company rate.

    Low income people were now taxed at their own rate rather than the trust rate and high income people kept their low level tax benefit.

    Happiness all round.

    But it all depended on the individual investor telling the fund what the correct rate was and boy did the funds send out lots of reminders. I got totally sick of them.

    Particularly when not filling them out meant you got taxed at 28% which was the top rate anyway.

    So the people getting caught out this week would have once told the fund to tax them at a lower rate. It wouldn’t have happened by accident.

    Although it is entirely possible they were on a lower rate at the time – because they had losses or something – and then ‘forgot’ to update it. Such people though would probably had a tax agent who would normally pick this stuff up. So not these people,

    The caught people I would suggest are people, without tax agents, who accidentally or intentionally chose the wrong rate at the time or are PAYE earners whose income has increased over time and didn’t think to tell their fund.

    But really only a tax audit would tell the difference between the two groups even if the effect is the same.

    Time Bar

    The other thing this week has shone light on is something known in the tax community as timebar (2).

    It is a balance between the Government’s right to the correct amount of revenue and taxpayer’s ability to live their lives not worrying about a future tax audit. The deal is that if you have filed your tax return and provided all the necessary information – but you are wrong in the Government’s favour – Inland Revenue can only go back and increase your tax for four years.

    If you haven’t filed and/or provided the necessary information – usually in cases of tax evasion – game on. The Department has no time constraints.

    But the thing is none of this is an obligation on Inland Revenue. It is a right but not an obligation.

    Under the Care and Management provisions (1) – the Commissioner must only collect the highest net revenue over time factoring in compliance costs and the resources available to her.

    And so on that basis – I must presume – she has decided to not go back and collect tax for the last three years underpaid PIE income. In the same way he – as it was then – decided to only pursue two years of tax avoidance that arose from the Penny and Hooper tax avoidance cases.

    Now I am sure this is completely above board legally in much the same way as the use of current accounts or the non-taxation of capital gains.

    But with a tax fairness lens, it makes discussions with my young friends quite tricky.

    They only have their personal labour which, to them, is taxed higher than I was at the same age. They don’t have capital and see this recent story as another way the tax system is slanted against them.

    So I am not sure we have seen the last of the motorway signs.

    Andrea


    (1) Section 6A(3)

    (2) Section 108

    Tax and politics (2)

    Kia ora koutou

    Andrea has handed over to us on the youth wing of the Andrea Tax Party for this week’s blog post so we can set out our views on tax.

    What she proposed is ok but we can’t help feeling it was more than a little influenced by her Gen X, neoliberal, tax free capital gain and imputed rent earning privilege. A bit like the recent Budget – more foundational than transformational.

    But we have also worked out that – by definition – any capital gains tax that applied from a valuation day or worse still grandparenting would have hit any gains our generation would have earned rather than the gains that have arisen to date.

    And don’t get us started about the exemption for a family home. The only members of our generation who will buy a house – with exorbitant mortgages – are those whose parents can help financially. Again more revealed Gen X privilege.

    So we aren’t super sad it is off the table.

    TOP are still promoting an alternative minimum tax and CPAG want to tax a risk free return on residential property. Both reasonable and we may yet move over to them but it the meantime we are seeing if we can do better.

    This is what we are thinking:

    Land tax on holdings over $500,000. Limited targetted exemptions.

    This was a proposal under National’s tax working group (1) in 2009/10 that was also then ignored by the Government at the time.

    The deal is that there would be a tax on the value of land. That’s pretty much it. There could be exemptions for conservation land, maybe land locked up for ecological services and Maori freehold land.

    The last one might be controversial but we are completely over the race baiting that goes on anytime different treatment for Maori assets comes up. Settlement assets were a fraction of that taken by the Crown and until such time as Maori indicators – not the least the prison population – gets anywhere near non-Maori, we are open to different treatment to improve outcomes.

    As this tax is certain what tends to happen is that the price of land falls by an NPV of the tax. The effect therefore is the same as a one off tax on existing landowners. And to be honest – we’d be open to that. Seems much lower compliance cost something Andrea and her friends get so excited about.

    Now we know there is an argument that because of the effect on existing land owners – this is unfair.

    However to a generation locked out of land ownership in any form due to the high prices – we are deeply underwhelmed by that argument. It was equally unfair that existing owners got the unearned gains over the last 10 years or so. And yes they might not be the same people who are affected – but again – underwhelmed.

    So all holdings of land over $500,000 – other than those mentioned above – will be subject to a land tax. And honestly maybe we have the threshold too low.

    GST – no change

    This one causes us pain.

    We really want to drop the rate as poor people spend so such more of their income than rich people. But rich people who might be living off tax free capital gains still have to buy food – and they spend more on food than poor people. So a cut in GST is – in absolute terms – a greater tax cut for the rich.

    However the prevailing wisdom that increases in GST don’t matter if you increase benefits is also BS. This is for a couple of reasons:

    Benefits – until this Budget kicks in – are increased by CPI but low income households have higher inflation than high income households.

    Benefit increases do not survive National Governments. The associated rise in benefits from the GST introduction were unwound by the benefit cuts in 1992 and more recently benefits were eroded through changes to the administration by WINZ.

    And even Andrea witnessed the changed behaviour of WINZ as she was in receipt of the Child Disability Allowance from 2007 to 2012. She went from having a super helpful empathetic case manager to having the allowance stopped when they lost her paperwork.

    If anyone wants to argue instead that the last government increased benefits – bring it on – because if that is how Andrea was treated by them just imagine how WINZ behaved to people who weren’t senior public servants.

    So we are recommending no change here unless there was some way of making it progressive.

    Inheritance tax on all estates over $500,000

    Andrea might be fixated with taxing people when they are alive but all this means is that the huge untaxed gains that have been earned get to be passed on to the next generation. And yes that might be some of us but anything to reduce the wealth inequality in New Zealand has to be considered.

    We take Andrea’s point about this also applying to death of settlors (and maybe beneficiaries) but all estates over $500,000 will be taxed at the GST rate as it is inherently deferred consumption.

    Make the personal tax scale more progressive

    When Andrea started work in 1985 – as an almost grad – she earned $15,000 and paid $5,000 of that in tax. That is an average tax rate of 33% and probably a marginal tax rate of something like 45%.

    She had no student loan because University was free. In fact she also got a bursary of about $700 three times a year. There was no GST.

    Grads in 2019 start on about $50,000. Income tax is about $9,000. This is an average tax rate of about 18% and a marginal tax rate of 30%. Student loan repayments are 12% and GST is probably about 10% allowing for rent and savings. This gives a marginal tax rate of 52% which will then climb to 55% if they ever get a well paying job. So 10% higher tax than 1985 on pretty middling incomes.

    We get that including student loans might upset Andrea’s tax friends but we are also guessing none of those people have 12% of their earnings going to Inland Revenue every pay day.

    Team if it looks like a duck and quakes like a duck….

    In fairness we also know her father in 1985 had a marginal tax rate of 66% although he got deductions for life insurance and ‘work related’ expenses. Now parents top out at 33% plus say 10% for GST – 43%.

    We guess then parents should pay more but 1) not everyone has middle class parents 2) declining labour share of GDP and 3) the ones who can are already helping us and that is a recipe for entrenched privilege.

    So our policy proposal is:

    1) Make the changes Andrea suggests to stop all the tax avoidance and tax evasion.

    2) Extend the bottom tax rate of 10.5% to $40,000

    3) Increase the next tax rate to 25% from $40,000 to $70,000

    4) Bring in a new threshold of 40% at $100,000

    Or something like that.

    The bottom threshold needs extending to include anyone who can still receive any sort of welfare benefit while also earning income. That reduction in tax then needs to be clawed back for higher earners and really high earners just need to pay more.

    Emissions trading scheme

    And please if there isn’t going to be any sensible carbon tax or any environmental taxes could we at least put a proper price on carbon in the Emissions Trading Scheme.

    It is only human life on this planet we are talking about.

    We think that is it for us. Andrea and her Gen X biases will be back next week.

    Ngā mihi

    Young friends of Andrea


    (1) Page 50

    Tax and politics

    Your correspondent is back from Sydney. Had a great time because – well – Sydney.

    Managed to score a gig on a panel at the TP Minds conference talking about international policy developments for transfer pricing. An interesting experience as I am pretty strong in most tax areas except GST – and you guessed it – transfer pricing.

    But it was ok as I did a bit of prep and all those years of working with the TP people paid off. And of course I do know a little bit about international tax and BEPS so alg.

    Even a techo tax conference again reminded me just how different – socially and culturally – Australia is to New Zealand. Examples include: the expression man in the pub being used without any sense of irony or embarrassment and one of the presenters – a senior cool woman from the ATO – wearing a hijab.

    Can’t imagine either in tax circles in NZ.

    My particular favourite though was watching the telly which showed a clip of Bill Shorten describing franking (imputation) credits as something you haven’t earned and a gift from the government. Now Australia does cash out franking credits but – wow – seriously just wow. Kinda puts any gripes I might have about Jacinda talking about a capital gains tax into perspective.

    And in the short time I have been away yet another minor party has formed as well as the continuation of the utter dismay from progressives over the CGT announcement.

    In the latter case I am fielding more than a few queries as to what the alternatives actually are to tax fairness is a world where a CGT has been ruled out pretty much for my lifetime.

    Now while I have previously had a bit of a riff as to what the options could be, I have been having a think about what I would do if I were ever the ‘in charge person’ – as my kids used to say – for tax.

    To become this ‘in charge person’ I guess I’d also have to set up a minor party although minor parties and tax policies are both historically pretty inimical to gaining parliamentary power.

    But in for a penny – in for a pound what would be the policies of an Andrea Tax Party be?

    Here goes:

    Policy 1: All income of closely held companies will be taxed in the hands of its shareholders

    First I’d look to getting the existing small company/shareholder tax base tidied up.

    On one hand we have the whole corporate veil – companies are legally separate from their shareholders – thing. But then as the closely held shareholders control the company they can take loans from the company – which they may or may not pay interest on depending on how well IRD is enforcing the law – and take salaries from the company below the top marginal tax rate.

    On the other hand we have look through company rules – which say the company and the shareholder are economically the same and so income of the company can be taxed in the hands of the shareholder instead. But because these rules are optional they will only be used if the company has losses or low levels of taxable income.

    My view is that given the reality of how small companies operate – company and shareholders are in effect the same – taking down the wall for tax is the most intellectual honest thing to do. Might even raise revenue. Would defo stop the spike of income at $70,000 and most likely the escalating overdrawn current account balances.

    So look through company rules – or equivalent – for all closely held companies. FWIW was pretty much the rec of the OG Tax Review 2001 (1).

    Now that the tax base is sorted out – if someone wants to add another higher rate to the progressive tax scale – fill your boots. But my GenX and tbh past relatively high income earning instincts aren’t feeling it.

    Policy 2: Extensive use of withholding taxes

    The self employed consume 20% more at the same levels of taxable income as the employed employed. Sit with that for a minute.

    20% more.

    Now the self employed could have greater levels of inherited wealth, untaxed capital gains or like really awesome vegetable gardens.

    Mmm yes.

    Or its tax evasion. Cash jobs, not declaring income, income splitting or claiming personal expenses against taxable income.

    Now in the past I have got a bit precious about the use of the term tax evasion or tax avoidance but I am happy to use the term here. This is tax evasion.

    IRD says that puts New Zealand at internationally comparable levels (2). Gosh well that’s ok then.

    Not putting income on a tax return needs to be hit with withholding taxes. Any payment to a provider of labour – who doesn’t employ others – needs to have withholding taxes deducted.

    Cash jobs need hit by legally limiting the level of payments allowed. Australia is moving to $10,000 but why not – say $200? I mean who other than drug dealers carries that much cash anyway?

    Claiming personal expenses is much harder. This we will have to rely on enforcement for.

    Policy 3: Apportion interest deductions between private and business

    Currently all interest deductions are allowable for companies – because compliance costs. Otherwise interest is allowed as a deduction if the funding is directly connected to a business thing.

    Seems ok.

    What it means though is that for someone with a small business and personal assets such as a house, all borrowing can go against the business and be fully deductible.

    Options include some form of limitation like thin capitalisation or debt stacking rules. I’d be keen though on apportionment. If you have $2 million in total assets and $1 million of debt – then only 50% of the interest payable is deductible.

    Policy 4: Clawback deductions where capital gains are earned

    Currently so long as expenditure is connected with earning taxable income it is tax deductible. It doesn’t matter how much taxable income is actually earned or if other non-taxable income is earned as well.

    Most obvious example is interest and rental income. So long as the interest is connected with the rent it is deductible even if a non-taxable capital gain is also earned.

    One way of limiting this effect is the loss ringfencing rules being introduced by the government. Another way would be – when an asset or business is sold for a profit – clawback any loss offsets arising from that business or asset. Yes you would need grouping rules but the last government brought in exactly the necessary technology with its R&D cashing out losses (4).

    Policy 5: Publication of tax positions

    And finally just to make sure my party is never elected – taxable income and tax paid of all taxpayers – just like in Scandinavia will be published. Because if everyone is paying what they ought. Nothing to hide. And would actually give public information as to what is going on.

    Options not included

    What’s not there is any form of taxation of imputed income like rfrm. It isn’t a bad policy but taxing something completely independent of what has actually happened – up or down – doesn’t sit well with me.

    Also no mention of inheritance tax. Again not a bad policy I’d just prefer to tax people when they are alive.

    And for international tax I think keep the pressure on via the OECD because the current proposals plus what has already been enacted in New Zealand is already pretty comprehensive.

    Now I know none of this is exactly exciting and so I’ll get the youth wing to do the next post.

    Andrea


    (1) Overview IX

    (2) Paragraph 6

    (3) Treatment of interest when asset held in a corporate structure

    (4) Page 11 onward

    The other Boleyn girl

    Since coming back from hols your correspondent has been struggling with an annoying cold. That bad side is that my yoga practice has suffered. Good side is that I have had greater opportunity to sample the ever expanding Netflix menu.

    So for comedy I can recommend Santa Clarita Diet, Huge in France and Derry Girls. For documentaries I can recommend Bobby Sands 66 Days, Black Panthers and Period. End of sentence. Oh and Knock Down The House of course. Obvi.

    Now for reasons that are beyond me – although constant checking for the next season of The Crown may have had a minor effect – Netflix is recommending The Other Boleyn Girl to me. A book I read many years ago while stuck in an airport but not one I want to watch immediately after a documentary on IRA hunger strikers.

    AI still has a way to go.

    Anyway the story is that there was apparently an older Boleyn sister that Henry was keen on before he was keen on Anne. And she was probably better coz she loved him much more but is now like super obscure – or possibly completely fictional – and so like it all could have been so different.

    Now in CGT land there is also another Boleyn girl. Leading up to the finalisation of the report one of the members – Robin Oliver – put together a sketch of an alternative way of taxing more capital gains.

    It has the pithy title of Robin Oliver: Taxing Share Gains but not Gains Made by Companies: Member Note for Session 24 of the Tax Working Group. It also got the slightly more pithy title in the media of CGT Light.

    And yes I know there won’t be anymore taxation of capital gains but acceptance is a process and, as a relational being , I am (over) sharing.

    So off we go!

    Now I am sure you all know dear readers the final design was one of:

    • Gains taxed from valuation day
    • Loss ringfencing in ‘transition’ period but limited constraints thereafter
    • Applying to most – currently untaxed – assets
    • Limited rollover relief when buying other assets
    • No change to existing rules for debt or foreign shares

    And the associated issues with this were:

    • Difficulties with valuing hard to value assets like goodwill particularly when only part of a business is sold off
    • Revenue risk in downturns
    • Incentivising ownership of foreign shares over New Zealand shares
    • Lock in
    • Complex rules to prevent double deductions within corporate groups
    • Troy Bowker getting upset a lot.

    Now there were possible ways of reducing all those issues – except maybe the last one. But Robin had a go at looking at it all a bit differently while still ultimately taxing more capital gains on a realised basis.

    In particular he suggested:

    • Taxation of gains on residential property – valuation method as per final report
    • Possible taxation of other land but with extensive rollover provisions
    • Inclusion of depreciable property – although in practice this just means losses and/or depreciation would return for buildings that fall in value with gains taxed if rise in value. Maybe software would also be affected but most depreciable assets already get deductions for their decline in value.

    So far not that much different to the final report. However there were four key differences:

    • No increased taxation of capital gains – other than above – at company level
    • Shareholder of listed companies taxed on gains on sale from a valuation day
    • Shareholder of unlisted widely held companies taxed on gains on sale. Existing holdings grandparented
    • Shareholder of closely held company taxed on gains on assets sold by company. Existing goodwill of companies grandparented.

    In some ways this option was lighter than that of the final report:

    • Existing holdings of widely held unlisted companies would be outside the tax but they would also be outside the complexities of valuation, the median rule and loss ringfencing.
    • Existing goodwill of closely held companies would also be outside the tax but also outside the complexities of valuation, and the median rule.

    Now while the grandparenting thing seems like a big gift, it would have been less than Australia did coz they grandparented – didn’t apply the tax to – all existing assets and now 30 years later Australia collect lots of money (1). And yeah it would have been less money to play with in the immediate period but a whole lot more money than is the case now.

    The non-taxation of assets in widely held companies would give a timing advantage to shareholders as tax wouldn’t be paid until the shareholders sold their shares. But it would mean that such groups wouldn’t have the compliance cost of the double deduction rules. And the Government wouldn’t have the risk that those rules didn’t actually work all that well and lose lots of money in the process. Coz it’s not like that has never happened before.

    But in other ways Robin’s option was actually tougher. Shareholders of closely held companies would be paying tax on any capital gain earned by the company – at their marginal tax rate. So if that was 33% they would pay tax at 33% not the company rate of 28%.

    Robin prepared all this as a possible option for Ministers and the Working Group made it very clear that the choices were not binary and the hard stuff was in the active business area. So it could have been worked up by officials as an option in any discussion document – even if they weren’t wild about it at the time. (3)

    The Government might even have grandparented all existing assets as Australia did and take away all the noise. And yeah it would take a while to build up but after 10 years or so (4) – serious money.

    But it was not to be. And in the end all possibilities went the way of the real Boleyn girls.

    Thanks for listening.

    Andrea


    (1) Page 28

    (2) Paragraphs 11-13

    (3) Robin’s response to officials comments

    (4) Figure 3.10

    Online shopping

    Taking a break from TWG report proper stuff for a bit. Although very pleased to see that when the government said no further work on a Tax Advocate they actually meant no further work except for its inclusion in a soon discussion document.

    Silly me and everyone else. Clearly misread the Government’s response. Recommendation 73 but getting over myself …

    And there has just been a tax bill passed back in the (tax) real world.

    R&D tax credits which seems largely to be a grants based system administered by IRD (1) and not anything I would recognise as a tax credit. But hey all the benefits of a grant while still calling it a tax thing. What’s not to love.

    And coming up strongly behind is the GST and low value goods bill which also has the loss ring fencing for residential rental property.

    Now the latter is pretty much loathed by the tax community. But as interest deductions in the face of untaxed capital gains is a bit of specialist subject/anguish for your correspondent I may write some more on that. As with no more capital gains being taxed I would say this is technology that should get a broader look.

    But today I am going to have a bit of a chat about the GST stuff. Now as your correspondent’s taste in clothes tends toward vintage reproduction, she is a big online shopper from relatively obscure American and now Swedish suppliers. And my one piece of tax avoidance has always been keeping purchases below $225 so that no GST would be triggered. Often a struggle – albeit a financially useful one – when the NZ dollar is weak.

    Now the $225 comes from the $60 de minimis Customs has where it won’t collect tax and duty up to that amount coz the admin to do so would be higher than the tax collected. So for clothes and shoes – another specialist subject but no anguish here – as there is a duty of 10% when you work it back this means $225 of clothes and shoes can be imported free of taxation and while for everything else it is $400.

    And yeah it is not a total free ride as there is postage involved and if things don’t fit sending things back is probs not worth it.

    Now this implicit tax exemption is only ever an administrative thing. It wasn’t like Parliament ever said ‘Off you go Andrea, have a foreign tax free dress, just keep it under $225 and only one at a time mind’. And so I have been expecting this loophole to be closed since forever.

    And now there is a bill to do just that a select committee. The vibe is that offshore suppliers will collect GST for goods under $1000 and Customs over $1000. Cool. So far so good.

    Except…

    First it is the poster child for high trust tax collecting. It requires the offshore supplier to register with IRD, collect GST and then pay it to the department. Three steps where – just saying – something might go wrong. Would hate to think I pay GST and it isn’t passed on. But for the big guys at least they face ‘reputational risk’ if things go wrong.

    Now yes we do have the bright, shiny, newish Convention of Mutual Administrative Assistance (2) that does include GST and yes the Department has tried hard to make the whole thing simple so yes the big people should get caught/ and or voluntarily comply.

    2) Suppliers paying to GST registered buyers don’t have to charge coz that would be compliance without tax. Fair enough but I am now GST registered, how will the offshore supplier know my single dress isn’t just like a sample? Or will they even care so long as they have an IRD number?

    3) Offshore suppliers only have to register if they are selling more than NZD 60k to people who aren’t GST registered. And yes this is self assessed by taxpayers outside out tax base.

    But how will IRD know if the supplier or I am not compliant? There really will be limits to the whole Convention for Mutual Assistance. And anyway if they sell less than $60k no GST is totes legit.

    But ultimately none of this should matter as any tax not collected by the offshore supplier will be picked up by Customs. Except …

    4) De minimis raised to $1000 value of item for goods not GSTed by supplier. Sorry wot? So if GST is not charged – correctly by my new obscure foreign retailer – or incorrectly because reputational risk isn’t a thing for them – my GST free band has increased? Yup.

    SMH.

    To be fair this is all sort of covered in the RIS (3) but I can’t find anything that discusses why the de minimis or threshold had to be increased.

    Interestingly the Tax Working Group explicitly looked at these issues and concluded that the de minimis should only be NZD 400. And this is the right answer particularly when fairness is the lens. Although I would have thought there was now a case to bring the de minimis right down to incentivise collecting at source.

    It is true that all the marketplaces and Youshops will get caught but anyone like me with any form of obscure foreign importing – which I am guessing is much like capital gains and a feature of a higher income/wealth profile – can now buy more tax free than before.

    And why this is important is that the official primary reason for this policy change was to increase the fairness of the tax system. Not efficiency or even revenue but fairness.

    And the thing about increasing fairness is that it might not reduce administrative costs. It might not improve the customer experience. But it says that tax is paid by everyone not just when it is easy to collect and people don’t get upset with you.

    So a day or so after discovering I won’t be taxed on capital gains, surely I am not also up for more GST free shopping? Hope not.

    Really hope this isn’t the beginning of fairness going back to Khloe or Pippa status.

    Andrea


    (1) In year approval page 6.

    (2) Article 2(b)(iii)(c)

    (3) Page 5 Potential behavioural changes by consumers

    An alternative progressive tax policy

    Your correspondent is having a lovely Friday. Thanks for asking.

    Started the day chatting to Terry Baucher on tax stuff and then Wellington is having one of its beautiful days.

    Had lunch with a friend setting the world to rights which included me riffing on what a progressive tax policy could look like that was a bit radical but not completely nuts.

    I have very tolerant friends.

    Anyway given the relational being that I am – I thought I’d share it with you.

    It starts from a place of Jacinda saying that while a CGT is off the table – nothing else is. And having spent the last 16 months or so thinking about tax stuff from a heavily constrained perspective – it is all a bit exciting to get off the leash.

    So it goes!

    Inheritance tax

    This would apply to all estates over a (tbd) threshold. It has the advantage of involving one of life’s certainties so wouldn’t be affecting behaviour at all. Now it might mean people pass on assets before they die and they might use trusts to avoid it.

    The former strikes me as a collateral benefit of the tax and the latter would need to involve rules involving death of settlors and/or beneficiaries. Next.

    Closely held companies

    They would become taxed at the top marginal tax rate to stop all the $70k and overdrawn current account stuff. There would be the option though of the look through company rules applying when incomes of shareholders are actually below $70k.

    Very small companies

    Consistent with a submission from Chartered Accountants of Australia and New Zealand (1) very small companies – tbd – would be taxed on turnover. Yes there are issues with it but it would reduce compliance costs for them and stop the revenue risk of oh gosh how did that personal expenditure get into my tax return.

    Property ownership

    The CPAG submission of a net equity tax would apply here. Yes it is similar to the TOP proposal but has the advantage of only applying to property so none of the valuation issues. Also I am not too stressed about partial family home exemptions so the types thresholds Susan St John proposes seem very pragmatic.

    Personal tax thresholds

    Any money collected – and quite frankly there may not be any when your focus is fairness rather than revenue raising – would go into raising the bottom threshold as per the TWG proposal.

    Then either this could flow through to everyone or get clawed back by raising the tax rate for the next threshold. Also a possibility raised by the TWG.

    Options not considered

    Raising the top personal tax rate

    Now I know this is a darling of the left and I accept I could be heavily coloured by having paid the higher rate for many years. But here’s the thing:

    It is taxing the top income earners who are already in the tax system paying tax on their income. It doesn’t touch income that isn’t taxed already in a way a number of the measures above do.

    Also the mismatch thing between different entities is a nightmare and to do properly would involve also an increase in the trust rate or face the use of trusts that were prolific previously.

    There is already an issue with a mismatch between the company rate and top personal rate which I am hoping the proposal for closely held companies would fix.

    Lowering the GST rate

    Now I get that GST is regressive. Totes. No argument. But as rich people spend more in absolute terms, they pay more GST in absolute terms. And if they are not paying income tax for whatever reason – if they want to eat they have to pay GST.

    So can’t recommend this I’m afraid.

    However also not a fan of raising it either. See comment on regressivity.

    Anyway that’s enough from me.

    So would this all make the tax system fairer. Totes. Could anyone get elected on this? No idea. Well beyond my skill set.

    Enjoy your weekend.

    Andrea


    (1) Pages 28-29

    Taxing more capital gains

    Now your correspondent loves a good paraphrase as much as the next socially progressive tax commentator. And so she had been largely unstressed about the use of the term capital gains tax by Jacinda on Wednesday or in any of the previous or subsequent discussion.

    A comms device. Alg. Important to focus on the substance of the announcement rather than any technical nit picking.

    But now I am not so sure.

    Indulge me a minute. Call it background if you will.

    Now what the Tax Working Group actually recommended was that more capital gains should be taxed. The majority – and me – thought a more comprehensive approach was best while the minority thought only gains on sales of residential rental should be taxed.

    And the reason it was framed like that was because the tax system already taxes a number of capital gains: financial arrangements, certain types of land sales, leasehold improvements, employee share options and (sort of) returns from foreign shares.

    It is true that by value lots are either excluded or administratively unenforceable. Looking at you assets purchased with the intention of resale.

    But all the discussion was on extending income taxation to different asset classes that generated untaxed capital gains – rather a capital gains tax per se.

    And here is why it matters.

    While we don’t have a capital gains tax – over time, or incrementally as the minority put it, – successive governments have deemed specific capital gains to be taxable income when it is clear that untaxed gains are being substituted for taxable income. It has been the safety valve for the lack of a formal capital gains tax. And all done without any fanfare.

    So it was with a degree of surprise upon watching Jenée Tibshraeny’s excellent interview of the Minister of Finance, I heard him say that an extension of the bright line test was unlikely because it would be too much like a capital gains tax.

    Sorry?

    Now I am really hoping that what he meant was: it is unlikely because there isn’t much substituting taxable income for capital gain with residential property. Rather than it is unlikely because any capital gain that is now untaxed will not be taxed while Jacinda is PM.

    Because that would be a step backwards in terms of tax policy and make me properly sad.

    So now really looking forward to that new tax work programme.

    Andrea

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