The next day
Ok yes I am disappointed.
But probably no more or less than the members of the 2001 and 2008 tax reviews who also recommended greater taxation of capital. So it was always on the cards.
And to be fair the New Zealand tax system has never had a formal capital gains tax but has been taxing capital gains since whenever. All by deeming them to be taxable income.
IMHO this really hasn’t been the end of the world from a social cohesion point of view until that is – land prices went insane and somehow my generation extracted value from our children.
Now yes it would be awesome to tax that value extract – but what would be more awesome would be land prices falling. Coz something has gone gobsmackingly wrong when yopros need government intervention to buy their first home.
But back to tax.
Personally though I am surprised there wasn’t something. After all even the minority felt their was a very strong case to tax gains from residential rental and for those who were worried about valuation issues there was always the CGT lite option aka grandparenting.
But this is not to be.
So what is happening? Possible vacant land tax, cracking down of speculators and tax dodgers.
The former I am quite comfortable with as I think it has merit as a corrective tax. Needs to be better than Australia though. And yes local government is the best placed for that. Maybe a targetted rate or something.
Cracking down on speculators. Right.
Now there is the small matter of the brightline test which taxes sales within 5 years which – I would have thought – well included any speculation period.
And then there is the existing provision since whenever – bought with the intention of resale – which didn’t work very well so the Nats brought in the brightline test.
Unfortunately though compliance with these rules is a bit average and enforcement is a bit hard. (1)
Mmm
And there will also be cracking down on tax dodgers. Not quite sure I know what that means.
There are our friends the closely held companies and dividend stripping . Which is essentially winding up to extract an untaxed capital gain and setting up a new company. Rather than just getting a taxable dividend from the original company.
Taxing these capital gains would have helped the issue.
And so instead strengthening enforcement for closely held companies (2) will be considered a high priority area for the next work programme.
Except enforcement is operational and the work programme is policy so not quite sure how that will work. But maybe I should get over myself, go with the vibe and wait for the actual new work programme.
But the Charities (3) stuff is all looking good.
The things I am most saddest about though are some of the more innovative obscure issues that aren’t being even considered for inclusion on the work programme. Which really only means – ‘will get to it if have time’.
They are the :
- Tax Advocate service (4) which would have helped small business and given an additional source of advice to the Minister;
- Overarching purpose clause (5) to say what the point of taxation is;
These are all potential neutral unpolitical improvements to the tax system. But didn’t hear Jacinda ruling them out – so maybe still hope.
So I might write some more about these. Oh and the OECD work on digital services. But once I have processed all this.
Andrea
(1) Annex on compliance.
(1) Paragraph 17 Executive Summary
(2) Recommendation 66
(3) Recommendation 78-82
(4) Recommendation 73
(5) Recommendation 77b
(6) Recommendation 66. Although to be fair there is a suggestion this could be handled differently.
Cold as charity
Let’s talk about tax.
Or more particularly let’s talk about how charities don’t have to distribute.
Well dear readers the countdown has started to becoming a grown up again. Have been doing the ‘coffee thing’ and put my first real paid job application in on Friday. Most importantly checking my work clothes still fit after a year in active wear. And trying to blot out the horror that is womens work shoes. Not big on shoes at the best of times. Must be why I like yoga.
Now whether our remaining time together is long or short is out of my hands. But I’ll try to get up to date on some of the things I have been promising and not delivering on. And today is Charities. My past ramblings can be found here, here, here, and here.
Sometime pre Jacinda Matt Nippert started a series of articles on charities. The last one was all about how charities don’t actually have to distribute to worthy causes to be a charity. The highlight of the article was of course the quote from your correspondent that this was not a good thing. All about the value add me.
So today dear readers the explanation. You get how it is that even though charities get an income tax exemption and a one third subsidy on their donations from the people of New Zealand – the dosh doesn’t actually have to get to the people the charity is serving.
And as a special bonus issue you also get how businesses don’t even have to be registered with Charities Services to get the tax exemption. So good. No wonder we have so many charities in New Zealand.
Let’s start with that.
Section CW 43 makes business income tax exempt if it is carried out directly or indirectly for the benefit of a charity. What the indirectly thing means is a company or other entity owned or controlled by a charity. And yes the charity has to be registered but no actual like requirement that any subsidiary company is. But it has to be for the benefit of the charity though. So maybe that means the dosh has to flow up to the actual charity?
Well maybe dear readers. Remember how with accounting tax expense – this was tax that would need to be paid at some stage? Yeah well it is kinda similar here.
The lead case on all this stuff is an Australian one called Bargwanna. At least 4 courts over at least 10 years with shambolic facts and varying legal arguments. While the Commissioner ultimately won the case and the trust was found not charitable; it was a somewhat pyrrhic victory. As along the way the ATO lost its long held view that charities had to distribute its funds in order to be a charity. That is the word applied as in applied to a charitable purpose didn’t mean distribute but more a vibey thing of consistent with its trust deed. Oh and of course it never meant distributing its capital. I mean steady on.
Now while this might be all beautifully consistent with twelve thousand million years of trust jurisprudence; it does IMHO rather take the taxpayer for a mug. Remember the donations tax credit. Remember how for every three dollars you give a charity the government gives you one dollar back?
Now that donation could be considered capital by the charity. So no need for it to go anywhere except infrastructure – or an investment base on which income will also be taxfree – for the charity. And imagine if that were a charity you set up and controlled yourself? Knighthoods anyone?
Or alternatively maybe tax preferences – donations tax credit and all – are given to charities not so they can create beautiful balance sheets in perpetuity; but maybe it is to support them doing good things for the community? And yes I know it does include the advancement of religion – thank you Brian Tamaki. But maybe?
Now of course in New Zealand our word is benefit rather than applied. But not really much comfort as benefit is arguably looser than applied. So tax free income of charity businesses can continue to roll up and support the charity business’ balance sheet just so long as it benefited the charity in some undefined form.
But applied does turn up somewhere. It turns up in the deregistration tax for charities. All through consultation and the legislative process the deal was that the tax would apply unless the net assets were distributed to another registered charity.
Except at the last minute as a drafting matter – distributed became distributed or applied. While this may not have much effect in practice; it does mean that charitable companies who were previously registered with the Charities Commission and then deregister won’t have to pay the tax and won’t have to distribute their assets. Because their assets are by definition already applied for the benefit of the head charity. Awesome thanks Bargwanna. Still tax exempt under section CW 43 and no more nasty public disclosure with Charities Services.
To be fair though – more an issue of the underlying mess that is our tax and charites law than the addition of the word applied.
Now the last two governments have got close to the whole charities and businesses thing and then run away. No actual sign it is even on the radar with this one.
Maybe once they’ve fixed the housing crisis?
Andrea
#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
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. I 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
Fairly efficient or efficiently fair?
Let’s talk about tax.
Or more particularly let’s talk about the fairness v efficiency tension in tax policy.
You correspondent is now about two thirds through her gap year. There have been perks to not going to work. Meeting people I would never have met as a tax bureaucrat; working without getting out of bed; and morning yoga classes now being conceptually possible. And of course becoming your correspondent tops it out.
On the con side though is no income; a carefully curated wardrobe that just looks at me; and that not going to (paid) work is simply exhausting. I am the most demanding person I have ever worked for. There is no concept of downtime.
Another con as a chartered accountant is there is no benevolent employer meeting my training needs – and my CPD hours – without me realising it. So with this in mind earlier this year I arranged to attend – without credit – a postgrad course on International Tax. Two days which should sort out my CPD. Or at least push out the problem for another year. And after all those years in tax I know the benefit of deferral.
Now as a participant I need to give a talk. So I heroically offered to talk about the tension between the tax fairness people and the tax efficiency people. As at that time I thought I had reconciled them. Now not so sure. So I thought I’d riff to you dear readers and see how we go.
It is an internal discussion I regularly have – yes I really am that interesting. As in my heart I am a tax fairness person but one whose head worries about tax efficiency.
Let’s start with the wot these guys say:
Fairness people say: Everyone should pay their fair share; People should pay in proportion to their income; Tax is the price you pay for civilisation.
And Gareth has a nice general take on all this which can be paraphrased as an unfair economy is inefficient. But while I am quite attracted to that as I can’t explain it without hand waving – I won’t.
So going back to things I do understand.
Efficiency people say: New Zealand needs be an attractive place to invest; it is important tax doesn’t distort decisionmaking; company tax is a tax on labour.
Now in a domestic setting – New Zealanders using New Zealand capital employing New Zealanders; through the use of withholding taxes and imputation – efficiency and fairness cohabit happily. Wages are deductible by firms and taxable to employees. Tax is deducted by the employers on the wages and this offsets the tax liability of the employee. Company tax can be used as a credit when dividends are paid.
There is a progressive tax scale for individuals which applies no matter how they earn their income. There can be deferral benefits if money stays in a company; a concessionary PIE rate for top income earners; and interest is deductible when capital gains are earned. But all of this is cohabitation peace and harmony compared to the situation with foreign capital and New Zealand workers.
Now with foreign capital, tax paid here is next to worthless. The fairness argument is that it is that the tax is the price for using the infrastructure and educated workforce paid for from taxation. Reasonable argument but problem is that the use of that stuff is not conditional on paying tax. Classic public good/freerider thing in economics which is supposed to be stopped through the use of taxation. Mmmm.
And foreign countries give no credit for company tax paid here. They might give credit for withholding taxes but there is this whole ‘excess foreign tax credit thing’ that means they don’t. For serious tax nerds, yes there is the underlying foreign tax credit given by the US when dividends come back. But we all know how much they come back. So foreign tax is a net cost of doing business. And like all costs something they will minimise if they can.
This becomes all the more compounded when the foreign investor is a charity or pension fund or sovereign wealth fund and doesn’t pay even tax in their home country.
So then the options are invest through deductible debt or pay tax but only invest if expected return is high enough to allow for paying tax.
Right. Then so how do we get the price of civilisation thing actually paid? Working on the assumption that foreign investment is good – when I think the analysis is a bit more nuanced than that – do we just have to suck up lower foreign investment if we want more tax paid?
If only we had some New Zealand based studies to see what happened? Oh yeah we do. Company tax was cut once by Dr Cullen and then again by Hon Bill.
Did we see an uptick in foreign investment? Nah – according to Inland Revenue foreign investment as a percentage of gross domestic product pretty much didn’t change.
Now of course there is a lot of noise in that; not the least that it happened over the GFC where normal rules did not apply. And Inland Revenue did have a go at reconciling all the stuff. Maybe.
But the best expanation I ever got for tax and how it influences foreign investment came from a tax mergers and acquisitions person I met during my time inside. They said there are two types of foreign investment:
- Normal foreign businesses who are looking to buy an equivalent New Zealand business. They make their decisons to purchase based on the headline tax rate and say the headline thin capitalisation ratios. Once that decison is make the tax people then swing in and look to minimise the tax further.
- The second type was the private equity lot for whom minimising tax was very much part of their MO. They turn up with elaborate templates – which include tax savings – which then all fed into the decision to purchase and at what price.
Is this right? Dunno but it has always made sense to me. And helps explain the often ‘inconclusive results’ found when two sets of behaviours are blended in any data set.
And who do the private equity lot include? Pension funds, sovereign wealth funds and charities who have zero tax rates.
Ok so what does all of this mean to tax fairness people? I think what it means is be aware that the zero tax rate of significant international investors combined with the internationally lighter taxation of income from capital – none of which is addressed in the OECD BEPS project – mean that getting tax off foreigners may bounce back on locals in the form of higher prices or reduced investment.
To the tax efficiency people though – settle down – any impact is not one for one. The Inland Revenue stuff does show that there is a degree of taxation that is just sucked up by the owners of capital. Coz ultimately all business income comes from people who can get a bit p!ssed if they think you are free riding on their taxes paid infrastructure. And maybe they’ll spend their money somewhere else. Assuming of course that there is a taxpaying alternative coz it’s not like domestic capital is free from loopholes.
So will I say all this in my talk this week? Dunno but thanks for the chat dear readers. My head is clearer now. Thanks for listening.
Andrea
Fairness – Take two!
Let’s talk about tax.
Or more particularly let’s talk about tax and fairness.
On leaving the bureaucracy last year there were two issues that drove me absolutely mental and I wanted to put my energies into. The first was the rising prison population at a time of falling crime rates and the second was homelessness. Since then with the former I have become the policy coordinator for JustSpeak and a trustee for Yoga Education in Prisons Trust. For the latter – zip.
So with that in mind I went to a recent Labour Party thing on Housing stuff. But about mid way Phil Twyford said that the Labour Party in its first term of office was going to do a comprehensive review of the tax system to improve its fairness. Now I have heard them talk about this before – but comprehensive review. Wow.
Since then Andrew Little has said they aren’t putting up taxes. So maybe this means this working group will be ‘tax neutral’ in the way Bill English’s was?
Now on the basis that this isn’t simply code for a capital gains tax, I thought I’d do a bit of a scan as to what this could mean in practice. My focus will be on the revenue positive items as the tax community will have their own laundry list of revenue negative ‘unfairnesses’ they will want fixing.
But first I am going to get over myself. Yes fairness could mean a poll tax but when the Left talks about tax and fairness it is implicitly a combination of horizonal and vertical equity. Horizontal equity where all income is taxed the same way and Vertical equity where tax rises in proportion to income.
Alternatively tax and fairness to the Left can also mean using the tax system to remove or reduce structural inequities in the economy and not just in the tax system itself. So here we go:
Untaxed income
Capital income
Now the most obvi unfair thing is the way capital income is taxed more lightly than labour income. Always loved Andrew Little’s comment about the average Auckland house earning more than the average Auckland worker. Dunno why he doesn’t use it more.
Now the lighter taxation might be there for some good reasons including:
- Long periods before it is realised. Is it fair to tax people when don’t have cash to pay the tax?
- Valuation issues. Although this goes once move to realisation based taxes.
- International norm. Soz unfortunately everyone taxes capital more lightly – sigh.
- Lock in effect. If have to pay tax would you ever sell?
- Incentive for entrepreneurship which is a good thing apparently.
Oh and not being able to get elected.
Options include a realised capital gains tax or Gareth’s wealth taxation thing. Both have issues but both would be an improvement if fairness or horizontal equity is your thing.
Imputed rents
Alongside the not taxing capital gains is that we don’t tax imputed rents. Remember how owning your own home is effectively paying non-deductible rent to yourself and earning taxable rent? Except the value of the rent is not taxed? Awesome. But its non-taxation also offends the horizontal equity thing – even if it is your house – and so is unfair.
Active income of controlled foreign companies
New Zealand companies that earn foreign business income in their own names are taxed. New Zealand companies that earn foreign income through a foreign company aren’t. Why? International norm. Not fair but everyone else does that too. Also brought in by Michael Cullen. Nuff said.
Capital or wealth taxation
While Gareth’s thing is potentially wealth taxation it really is taxation of an imputed or deemed return on wealth rather than a tax on wealth per se. Actually taxing capital or wealth is where inheritance or gift duties come in.
Now neither of them are actually income taxes. They are outright taxes on capital. And if that capital arose from taxed income then would be very unfair to tax. However not entirely sure that is the case and these taxes are relatively painless as they tax windfalls; don’t effect behaviour and only apply to the well off. So they potentially promote fairness from a ‘reducing inequality’ sense rather than a horizontal or vertical equity sense.
Deductions
There are a few things here. There are all the issues with interest and capital gains but they reduce if you ever tax capital gains or do Gareth’s thing. Others include:
- Borrowing for PIE investment can get deductions at 33% while PIE income is taxed at 28%
Donations tax credit
Now this isn’t an obvious one as everyone can get a third back of their donations up to their total taxable income. So that is pretty fair. But the more taxable income you have the more subsidy you get. And it can go to a decile 10 school; your own personal charity or a church with an interesting back story. But dude – seriously – who can afford to give away all their taxable income? Perhaps worth a little look.
Labour income
Withholding taxes
Labour income that is earned as an employee is subject to PAYE and no deductions are allowed. Labour income that is earned as a contractor is only sometimes subject to withholding taxes and deductions are allowed. Aside from deductions which are likely to be pretty minimal with most employee type jobs – there is an evasion risk when people become responsible for their own tax. Spesh when such people are on very low incomes. Whole bunch of other ‘fairness’ issues too like access to employment law; but this is just a tax post.
Personal companies
Labour – and any income – can also be earned through a company. And a company is only taxed at 28% while the top rate is 33%. So if you don’t need all that income to live off you can decide how much stays in the company and how much you pay yourself. Is that fair?
Other things
Now of course there is always the old staple – increasing the top marginal tax rate. And yes that does enhance vertical equity but it also causes other problems elsewhere. So if you are going to make the system more misaligned please make sure that it doesn’t become the backdrop for widespread income shifting as it did last time.
Oh and secondary tax. Now there are many things that are unfair including precarious work and over taxation. Not sure secondary tax is one of them. While you have a progressive tax scale and multiple income sources – you get secondary tax. It appears that under BT – page 22 – the edges can be taken off getting a special tax code which should help but secondary tax in some form is structurely here to stay.
Look forward to it all playing out.
Andrea
All The Right Moves
Let’s talk about tax.
Or more particularly let’s talk about the charitable tax exemption given to Scientology.
For reasons that are beyond me I have seen very few of Tom Cruise’s movies. Even in the mid/late eighties when he and I were in our respective heydays. Whether it was my twice weekly Rocky Horror attendance that crowded them out or the current boyfriend didn’t want the competition – couldn’t tell you. And it wasn’t as though I was super geeky or anything. Both The Breakfast Club and Merry Christmas Mr Lawrence ‘spoke to me’ – I was young what can I say – so defo the target audience for Mr Cruise. Also have never seen An Officer and a Gentleman but I think that’s Richard Gere.
I did see All The Right Moves an early film that wasn’t too bad. And I did see one of the Mission Impossible films with my boys. Truly excreable but it was clear my offspring not me were the target audience there.
Apart from his films and rotating cast of wives, Tom Cruise is also famous for being a member of the Scientology church which became newsworthy last week. Now again for reasons that are beyond me I had always thought that the Scientology Church wasn’t a registered charity in New Zealand. But recently a former colleague told me that I was wrong. Perhaps I was thinking of the Jedi? Coz they aren’t a registered charity.
Yeah that must be it. I was thinking of the Jedi.
But just in case I am not the only one confusing them with the Jedi, I thought I might look at what is public on the Charities Register and how they could have got registered.
Mr CharityWatchNZ and Society for the Promotion of Community Standards – name which is a blast from the past Patricia Bartlett who didn’t like swearing or nudity – have both done more fulsome discussions on Mr Cruise’s religion in New Zealand which are worth a read.
Now I am sure you remember from A Plague on all your Houses that there are two ways Scientology could become registered. One through the advancement of religion where the benefit to the community is just assumed or through the catch all option of other matters beneficial to the community where there is also a public benefit test that needs to be met.
It appears to have been registered as a religious charity but its purpose statement seems to cover all bases. Arts and culture; social services; human rights as well as emergency disaster relief . All for the general public and not just members of Scientology. Lucky us. A degree of divinity is defo needed to do all that.
And from the news reports that is what they say they are doing too. Refurbed a heritage building complete with dolls and help disenfranchised youth. Your correspondent is big on help for disenfranchised youth and am sufficiently twee to enjoy a nice heritage building. So go them.
But of course being charitable they not only don’t pay tax on trading income – they also get access to the donations tax credit. You know the one where the ever tolerant taxpayers of New Zealand effectively give a charity one dollar for every two donated. And looking at their annual return this means potentially $600k in 2015 and $250k or so in 2014 and 2013. So – assuming all donations claimed the credit – over $1m in 3 years. But it is a lovely building and what about all those disenfranchised youth.
Now they apparently do other stuff. Auditing or something. And if that isn’t beneficial to the community I don’t know what is. Wonder if I can get a donations tax credit for my CAANZ registration? Don’t actually know how to audit though. I wonder if investigate is close enough?
Andrea
Unconditional – it’s what it means
Let’s (briefly) talk about tax ( and education). Again – yes I know.
The headline of today’s Dominion Post showed that in 2015 schools collected $11 million in donations more than they had previously. Now dear readers after And another thing you all know that this means that of the extra $11 million the government subsidied this by a third.
Also interesting if you follow the embedded Stuff links you see that decile 10 schools dominate the donations stakes. By about $329 million to $2.8 million. Mega yuck given this just happens automatically and doesn’t go through Parliament every year as Education budget does.
Now this we have discussed before and promise I am not interrupting your Saturday to moan again about that.
The reason for this postette is the reference to how music lessons and school camps and the like are now being reclassified as donations.
No just no.
IRD guidance is very clear that donations need to be an ‘unconditional gift’. Nothing in return. A cash version of seva although they will probs never use that analogy.
The law is very clear and any ‘reclassification’ will be very easily overturned by the department. Please apply your brain. If you get anything in return – it ain’t a donation and so no donations tax credit.
Simple. Please carry on.
Namaste
What a capital affair!
Let’s talk about tax (havens).
After eight days on a yoga course the role of balance in postures and in life was a recurring theme. And upon finishing the course this was brought home to me quite starkly. As after eight days of sequencing Sun A and B without naming the poses, understanding my inner child and hugging people that were a week ago complete strangers – your correspondent spent the subsequent week talking about multinationals and tax havens.
Yin and yang. Perhaps not as it is traditionally known but defo in my life.
Now my views on multinationals are ‘on the record’ but I realised I haven’t ever properly discussed tax havens.
Putting aside for a moment that no country has ever owned up to being a tax haven. And so much like the term ‘fat’ – it is in the eye of the beholder.
There are a number of criteria floating around but really they can be summarised as:
- low or no tax and
- secrecy.
So yeah for New Zealand and foreign trusts pre Shewan report probs more tax haveny than not and post Shewan less tax haveny than not.
In the campaigns against them, tax havens are often swept up with the ‘multinationals – bad’ messaging. And the story goes something like this:
Multinationals strip profits from developing countries to tax havens. No tax paid in developing country or tax haven. Profits then not sent home coz they don’t want to pay tax on them. Double non-taxation – bad thing – everyone loses.
But in that story there are 2 quite distinct players:
- The developing country who is capital importing and
- the home country who is capital exporting.
The concerns of the developing or capital importing country – of which New Zealand is one – is to ensure that some tax is paid for the use of resources or on the location specific rents.
The concerns of the home or capital exporting country is to ensure that it receives some tax – after foreign tax is paid – for the capital invested.
Traditionally these two concerns have been reconciled through the OECD model for tax treaties. Broadly the approach is to let the source or capital importing country tax first but not too much. Then let the residence country also tax the income but give a tax credit for tax paid at the source country level.
Now that all works beautifully when structures are very simple and the person earning the money in the source country belongs to the capital exporting country. It becomes much more complicated when even simple entites like companies are in the mix. And it all starts to completely break down when tax paid in the capital importing country has no value as a tax credit to the ultimate owner of the capital.
Coming back to tax havens. For capital exporting countries where the multinationals are headquartered, tax havens then are a complete bugg@r. They potentially – will come back to this – put a block on the return on capital from the source country to them.
For capital importing countries like NZ the issue is not so clear. As IMHO isn’t the real concern returns leaving the country untaxed rather than where they go? Coz we have already seen with the use of hybrids it is quite possible for tax to be paid nowhere without a tax haven in sight. Also that income could also be directed to companies in the international group that were otherwise loss making – cross border loss refreshment. So really for capital importing countries, tax havens are just a tool in the mix rather than the definitive source of tax badness.
The story with tax havens being a blight on developing nations is also more nuanced than would first appear as they are often tax havens themselves. Vanuatu? Cooks? Admittedly more low rent – and therefore I would imagine more exploitable – than say Jersey or Bermuda but they still turn up on lists of potential havens.
Also capital exporting and importing countries are not as powerless against tax havens as it would first appear.
For capital exporting countries there is a 50 plus year old tool called the controlled foreign company rules that can be used against tax havens. The way it works is to say – you know if any foreign company is ultmately controlled by anyone in our country – well guess what we want to tax that income too. Trick can be knowing that income exists and so that is why the disclosure campaigns, TIEAs and automatic exchange of information are so useful. And if there continues to be non- disclosure this ups the ante with the tax administration to become potentially tax evasion and the spectre of the prison wall.
For capital importing countries its weapon of choice is the even more old school withholding taxes. Payments made to tax havens can have tax withheld at what ever rate you choose if you don’t have a tax treaty with that country. And if the treaty is a problem – it can strictly speaking be withdrawn.
The fact that these don’t happen really – IMHO – comes down to an international consensus to tax capital income more lightly than labour income. Aggravated by:
- The zero rate of tax borne by charities and pension funds;
- The active income exemption from the controlled foreign company rules;
- Classical taxation of dividends.
None of which provide any incentive to pay tax at the source country or even the home country.
Now tax havens can still be annoying to New Zealand to the extent our people have undisclosed money offshore – and the non- complying trust is worthy of its own future post – but as a country we are a net capital importer and so have much the same issues as the developing countries. And at times the label tax haven comes our way too – fairly or not.
Namaste
And another thing
Let’s (briefly) talk about tax (and donations to schools).
Following Monday‘s post I got to think about the other ‘advancement’ head of charity – education.
Now there is the whole controversy about whether donations that schools seek are really for extras and their role in an education system that is supposed to be free. And there is the thing about decile funding that the government gives less to higher decile schools coz they can fund raise.
But if that ‘fund raising’ comes from ‘donations’ then the government again gives one dollar for every two actually donated. So the bigger the donation and the higher level of actual payment – the more the government gives.
None of which is recorded in the education budget coz it is an off the books tax expenditure. So the schools with richer parents get more government help. Very progressive.
Probs not actually intended. More likely to just be an interface of separate policies and never actually thought through. Shame.
Now for those of you who are properly interested in the can of worms that is tax and charity stuff I’d recommend my friend CharitywatchNZ‘s blog. Not currently being updated as he has gone back inside (the bureaucracy) for a while. But still all good stuff.
Namaste
Let's Talk About Tax NZ 