There is nothing much more humbling than motherhood. No matter how competent you are in your day job, one’s darling offspring have the ability to test every part of you.
For that reason I have rarely met arrogant mothers. Sure most of us have views about the right way of handling things but that is really a function of values and how your particular child works.
Because children’s superpower is their ability to ensure that we are only ever one meal or one exam or one party away from fully questioning our ability to raise the next generation.
Tax is much like that too. Tax people can be confident but we all know that we are only ever one opinion – missing a section or a case – away from falling completely on our faces.
And so it is for me on my recent post on Fringe Benefit Tax and double cab utes. Inland Revenue have kindly reached out to me to point out I overlooked a subsection – not the first time that has happened – and so office workers could not get the work related exemption if they had a sign written double cab ute.
I accept their analysis and accept that there is nothing in the law or its interpretation by Inland Revenue – as they have outlined it – that is driving the double cab ute phenomenon.
However it would be good to know how much FBT – or personal use adjustments – actually arises from personal use of the double cab utes. Because the ones I see aren’t even sign written.
Reply from Inland Revenue
We have read your recent blog “Emissions, Feebates and Fringe Benefit Tax”(12 July 2019) and have a couple of comments regarding double cab utes and the work related vehicle exemption.
You have suggested that a sign-written double cab ute would be exempt from FBT under the work-related vehicle exemption. However, the work-related vehicle exemption is actually far narrower than that. Section CX 38 defines work-related vehicle:
CX 38 Meaning of work-related vehicle
(1) Work-related vehicle, for an employer, means a motor vehicle that prominently and permanently displays on its exterior,—
(a) if the employer owns the vehicle, the form of identification that the employer regularly uses in carrying on their undertaking or activity; or
(b) if the employer rents the vehicle, the form of identification—
(i) that the employer regularly uses in carrying on their undertaking or activity; or
(ii) that the person from whom it is rented regularly uses in carrying on their undertaking or activity.
(2) Subsection (1) does not apply to a car.
Exclusion: private use
(3) A motor vehicle is not a work-related vehicle on any day on which the vehicle is available for the employee’s private use, except for private use that is— (a) travel to and from their home that is necessary in, and a condition of, their employment; or (b) other travel in the course of their employment during which the travel arises incidentally to the business use.
Paragraph (3) of s CX 28 is often overlooked. It states that if the vehicle is available for private use (other than for travel from home to work or incidental travel) then it is not a work-related vehicle and it will be subject to FBT. The exemption is actually quite narrow.
Inland Revenue interprets s CX 28(3)(a) to mean an employee cannot use a vehicle for private use except for travel to and from their home where that travel has a direct or needed relationship with the employee’s employment; and is a requirement of that employee’s terms of employment. So in your scenario, the shareholder-employee that runs the office would not be entitled to the work-related vehicle exemption. We make this point explicitly at para  of Interpretation Statement IS 17/07 “FBT and Motor Vehicles”:
For example, if a receptionist is given a vehicle to travel between home and work, the employer would not be entitled to the benefit of the private use exclusion in s CX 38(3)(a), because the travel to and from home is not necessary to the receptionist’s role.
We have tried to clarify this aspect of the work-related vehicle exemption for taxpayers and their advisors. Our Interpretation Statement IS 17/07 “FBT and Motor Vehicles” https://www.classic.ird.govt.nz/technical-tax/interpretations/2017/ explains the exemption in detail from para  onwards. We have also made a video on the work-related vehicle exemption: https://www.classic.ird.govt.nz/help/demo/fbt-videos/
Hope this helps and happy to discuss this with you if you’d like.
Let’s talk about tax.
Or more particularly let’s talk about the recent Australian transfer pricing case Chevron.
In a week when Inland Revenue announced a major restructure which will involve staff now needing ‘broad skill ranges’; it made me think of the type of work I used to do there – international tax.
It was true that my job needed skills other than technical ones:
- keeping your cool when being verbally attacked by the other side;
- being able to explain technical stuff to people ‘who don’t know anything about tax’ – aka anyone at Inland Revenue not in a direct tax technical function;
- ensuring the bright young ones got opportunities and didn’t get lost in the system; and
- generally ‘leveraging’ my networks to support those who were doing cutting edge stuff but not getting cut through doing things the ‘right’ way.
But otherwise what I did required a quite narrow specialised technical skill range. And that was good as it allowed me and my colleagues to focus on one particular area so we could be credible and effective. You know kinda like professional firms do?
As an aside I am not sure how this broad skill ranges thing ties in with the original business case – page 36 – which alluded to the workforce becoming more knowledge based. Coz knowledge-based work is kinda specialised not broad. But then the proposals are coming from a Commissioner who has a legal obligation to protect both the integrity of the tax system as well as the medium to long term sustainability of the department so I am sure she knows what she is doing.
Wonder what the penalties are for breaching those provisions? But I digress.
Back to me. The international tax I did though was actually quite broad compared to the work my colleagues did in transfer pricing. That was eye wateringly specialised and quite rightly so. These were the girls and boys who were on the frontline with the real multinationals like Apple, Google, Uber and the like.
The guts of the case is that Chevron Australia set up a subsidiary in the US which borrowed money from third parties for – let us say – not very much and on lent it to Chevron Australia for – let us say – loads. And it was with a facility of 2.5 billion US dollars. Now you can kinda imagine the difference between not very much and loads on that was a f$cktonne of interest deductions – see why I get obsessed with interest – and therefore profit shifting from Australia to the US.
Now even though it was a subsidiary of Chevron Australia; the Australian CFC rules don’t seem to apply to the US. Coz comparatively taxed country – thank god we don’t have those rules anymore. And the judgment says it wasn’t taxed in the US either. Didn’t spell out why but I am guessing as the Australian companies are Pty ones – check the box stuff – they get grouped in the US somehow. No biggie for US but bucket loads less tax than they would otherwise pay in Australia.
And according to Chevron it was like totes legit. Coz loads is the market price for lots of really risky unsecured debt. I mean seriously dude like look up finance theory.
To which the seriously unbroad people in the Australian Tax Office said – yeah nah. Theory is like only part of it. The test is what would happen with an independent party in that situation.
- Option one – the seriously risky party ponies up with guarantees from those who aren’t seriously risky. You know how those millennials who buy houses and don’t eat smashed avocado do when their parents guarantee their loans? It is the same with big multinationals.
- Option two – banks don’t lend. So just like for all the milennials who don’t own houses but who do eat smashed avocado and don’t have rich parents.
And the Australian court thought about it all – pointed at the unbroad public servants – and said:
“What they said. Chevron you are talking b%llcocks. The arms length price is one an independent party like millennials would actually pay. This includes guarantees and you price on those facts. Not the fantasy nonsense you are spouting.”
Well broadly. Actual wording may vary. Read the judgments.
Now these are seriously useful judgments – internationally – for the whole multinationals paying their fair share thing. Let’s just hope New Zealand keeps the people who can apply them.
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.
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.