Let’s talk about tax.
Or more particularly let’s talk about the tax rules for deregistering charities.
It has been a big intellectual week for your correspondent. Tuesday night White Man Behind a Desk. No tax. An interesting riff on immigration that Michael Reddell clearly wasn’t the tech checker for. Wednesday night Aphra Green Harkness Fellow on US criminal justice reform coz States just ran out of money. Tried to run an argument that this was the good side of low taxes. Didn’t resonate – go figure. And Wednesday morning – Roger Douglas on turning taxes into savings coz #taxesaregross.
And it was on the lovely Roger I planning to write but on Friday was the Greens on how there were bugg@r all foreign trusts reregistering. So I thought I’d write about that and the genius decision to require disclosure rather than taxation.
And as if that wasn’t enough. Saturday morning the latest Matt Nippert on a US and charities thing. An elderly couple with no heirs wanting to transfer wealth to a charitable institution – awh lovely. So nice they chose NZ. But also Panama, low distributions and references to the IRS. Ok. Initial reaction was it looks like FATCA avoidance coz NZ charities are outside its scope of reporting to IRS. Really must get on to my ‘US citizenship is not a good thing for tax’ post. It has been in the can for longer than this blog has been running. So embarrassed.
But one thing really caught my eye. The charities had voluntarily deregistered. Mmm interesting.
Your correspondent now moves a tiny bit in the Charities NGO sector. And from time to time I hear ‘should we stay a charity? Coz need to be careful over advocacy and ActionStation isn’t a charity and it is alg for them.’
To which I try to reply in my best talking to Ministers language: ‘ That’s one option. It would mean handing over a third of your reserves in taxes or all of your reserves to another registered charity. But totes – if that is what you want.’
Strangely the conversation doesn’t continue.
Coz the law changed in 2014 to stop the rort of charities getting lots of lovely tax subsidised donations, not distributing; deregistering and then keeping all that lovely taxpayer dosh for themselves. Go Hon Todd!
Now on the face of it this should apply to our friends here very soon. Section HR 12 applies a year after deregistration and turns the reserves – less wot go to another charity – into taxable income.
Except there doesn’t seem to be anything explicit that makes it New Zealand source income. Possibly personal property or maybe indirectly sourced from New Zealand. But the source rules are kind of old school and want to bite on real stuff not deemed income. No matter how worthy of New Zealand source taxing rights it should be.
And of course none of this matters dear readers if the entity is New Zealand resident. Coz everything gets taxed! And as the trustees are a New Zealand company – high chance it will be. So alg.
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.
Let’s talk about tax (and tax avoidance).
Last week the government announced it was building yet another prison. Another moral and fiscal failure. Skilfully continuing to over turn the falling crime rate dividend we had in 2013 before the bail laws changed.
Also last week a reader made a comment about how wasn’t tax avoidance ‘legal’.
Another such observation on tax avoidance came from Denis Healey who said that the difference between tax avoidance and tax evasion is the thickness of a prison wall. She said trying to link two quite independent things together.
Now both maybe right in the United Kingdom but they really don’t directly translate to the New Zealand situation. So being the public spirited individual I am I thought I’d have a go at a layman’s guide to tax avoidance for New Zealanders. And no more mention of prison stuff – promise.
First of all tax avoidance is a term defined in the Income Tax Act. It comes in and overrides everything else in the Income Tax Act. So any provison in the Act theoretically runs the risk of tax avoidance coming in and saying – ‘you know what’ just kidding – bog off.
And it is defined in a way – directly or indirectly altering the incidence of tax – that could mean that anything you do that has the effect of reducing your tax could be caught. This could mean cutting your hours; paying off your mortgage instead of putting the money on term deposit; selling dividend paying shares to buy a car all could be classed as tax avoidance. As they were all plans or understandings – where the result was less tax was paid than before or less tax was paid than could have been.
Now as that couldn’t possibly be right the courts – helped by the Commissioner taking cases – has said it only applies when the outcome wouldn’t have been intended by Parliament. Right. Awesome. So much clearer now. Thanks for playing.
To be fair there is a little more to it than that. But largely it all boils down to:
1) strip away the clever stuff
2) work out tax result on stripped down ‘arrangement’
3) compare 2) to what went of tax return
4) Difference is tax avoidance.
Now most of the dispute between taxpayers and Commissioner is over what if any is the ‘clever stuff’.
In our friend Penny and Hopper putting a business into a trust was never challenged – coz you know creditor protection or keeping it from the missus wasn’t ‘clever’ it was just like ‘commercially acceptable’. In that case what was challenged as ‘clever’ was the trust paying the highly skilled doctors the same salary as they would earn in the public system – I mean Dude seriously who works for that?
The other recent case that made the tax community super mad – Alesco – involved the New Zealand business being funded by an optional convertible note. Now dear readers you may say ‘ ah yes I’ve read I choose you Pikachu ‘ an optional convertible note now that is ‘clever’ and so that is tax avoidance. Glad you are keeping up – but no. No what was clever here was that the option should have no value as Alesco Australia already owned all the shares – Duh. Other highlights of that case included the taxpayer arguing that while it was tax avoidance – it was Australian not New Zealand tax avoidance. All class.
Compare these then to the cutting your hours; paying off your mortgage or buying a car from savings. Nothing clever there – so long as that is all you are doing. Bit like our gentlemen below.
Now of course there is a line between a bit of tax planning – paying off your mortage before earning taxable income; funding a project with deductible debt or even investing offshore and receiving an exempt dividend – and tax avoidance. And because there is this line there will always be a Tax Administration and tax practitioners.
The thing is though that even if it is ‘tax avoidance’ it is a Civil thing and so no one goes to jail. They can lose the tax benefits; get hit with a 100% penalty plus interest of 8% – but no prison wall. Not even Home D.
Tax evasion however game on – Criminal charges defo in the mix. Now generally there is nothing clever with tax evasion. Just dirty fraudulent or deceptive behaviour: taking money out of the till; cashies – yes cashies; billing for a lower/higher number than is actually the case. Here jail time is totes on the cards and does happen. As well as a penalty of 150% and interest. And yes there is a line between avoidance and evasion too.
So is tax avoidance legal if Wikiquote says so too? Dunno it certainly isn’t criminal but does have high penalties.
So keep away from the clever sh@te and my former colleagues will probs keep away from you.
Let’s talk about tax, (withholding and labour hire firms).
Your (foreign) correspondent is in London this week catching up with friends and family over a quarter of a century since she arrived for her big OE. My timing was exquisite as the month I arrived – April 1990 – almost perfectly corresponded with the start of the Exchange Rate Mechanism recession and my departure in December 1993 with its ending.
Having lived through that I never want to live in a country again that does not have control of its monetary policy. For all Michael Reddell has concerns over Graeme Wheeler’s stewardship; what New Zealand is facing currently is nothing compared to what England in the early 90’s faced. That is being in recession with high interest rates all because Germany had inflationary pressures due to reunification.
The experience was all the more wonderful as my working career in New Zealand in the late 80’s as a junior accountant had involved losing my job twice without redundancy. Unlike a number of my peers though I was never unemployed. Had some less than wonderful employment experiences but never unemployed.
In April 1990 I had no idea though of the forthcoming recession and did what every other young antip professional did when arriving in London – I became a temp.
I worked for Warner Music using Lotus 123 to put together the monthly management accounts. This largely consisted on taking the general ledger and repackaging it into a usable form. It sounds easy but it wasn’t. My colleague whose desk was in front of mine did the same thing for the balance sheet. After several days and lots of checking with each other we would get the same number and we would stand up and high five each other. Yes we were cool. And our manager would then breathe a sigh of relief that he would be able to deliver that month.
I imagine Xero now does what Serjit and I did then.
Warner Music was based in North London – Alperton – and was a huge eyeopener for the white girl from Christchurch. Highlights included:
- My (Jewish) manager eating his bacon sandwich complaining like mad about the bombing of Jerusalem by Iraq because – it had interfered with the football game he was watching.
- Asking my very happily married (Sikh) colleague how he met his wife and being told it was arranged.
- That lots of the happily married young people in the warehouse and the office had arranged marriages.
- Being asked if New Zealand celebrated Christmas.
- Wearing jeans to work – it was a record company.
- Discovering that the white South African auditor was not only a perfectly reasonable human being – but that I had more in common with him than I did the English. FWIW the two of us discussing issues used to have the office in hysterics with our accents.
Anyway back to New Zealand tax. As a temp I worked for a labour hire company and not for Warner Music. The received wisdom was there were two ways I could be employed. Through my own personal services company which is what the cool kids did. They all had accountants and could claim expenses. Or through having PAYE deducted.
I cannot for the life of me remember why – but I went into the PAYE system. And oh man that was the right thing to do. I saved myself a world of pain because ultimately I saw the cool kids having to make appointments with accountants during chargeable work time; organise all their bank statements; and find cash for large tax payments. Although I didn’t see it I would imagine there was also a degree of just letting it all go and getting on a plane – effectively with their tax money -when their visa ended.
But all this ‘I am an independent contractor employed through a company’ stuff was a complete nonsense as they were employed by their labour hire firm as much as I was by mine.
Now Hon Mike is having a go at this nonsense in New Zealand. Nice one Hon Mike nice one. In the recent bill he is making labour hire firms withhold from all payments to all people and ‘companies’ they place. A good start. There is still all the people who contract outside those firms and whose activities are not on those schedules. You know – policy analysts for example. Next bill will be fine.
Recently the Labour party also had a go in this area trying to get the minimum wage legislation extended to contactors. The select committee report discusses the issues quite well including the general issue of the move from employees to contactors in the labour market which is of course a move out of withholding with the consequent risks to the PAYE tax base.
I was also pleased to see this discussion as in Budget 2012 the government replaced the child’s tax credit with a tax exemption for non PAYE income for children at school. David Cunliffe – I think – called it the Paper boy Tax budget. Nice line. But from the opposition there was a lot of wailing that these children would earn $20 for 5 hours work and now they would only get $17 because of tax. At the time I remember thinking:
- gosh that is a low hourly wage
- seriously – it is the tax that concerns you in that scenario?
But to be fair it was removed under budget night urgency where the opposition gets zero prep time. So with more prep we got the entirely sane and well thought out bill from David Parker. Tax however was missing.
It is entirely likely that such low income workers are using every dollar they earn and not meeting their tax obligations. Now Hon Mike you and I both know that this is called tax evasion. And you and I know this is a criminal offence; carrying a risk of a 150% penalty and jail time.
So Hon Mike how about a bit of joined up government. You already control the Revenue and Labour officials. Treasury whether it is Tax, Labour Markets and Welfare or Social Inclusion must also have a view.
And your government has made such an artform of swiping the best ideas from the opposition.
So go on. Nick this one too. Slap withholding obligations on the payer and call it your own.