Let’s talk about tax.
Or more particularly let’s talk about tax, debt and approach to law changes.
Twenty plus years ago I came back to New Zealand a little bit pregnant. And before 1992 – unless you were in the public service – pregnancy meant (job) resignation. A stage up I guess from marriage or engagement meaning resignation but pretty antediluvian even with today’s – Is Jacinda having a baby? – eyes.
Parental Leave had come in two years before I came back but couldn’t apply to me as I had left a job in the UK – not New Zealand. I was also more than a little over being an accountant – I was young what can I say – and fascinated by economics. Again young.
So decided I would use this time to retrain as an economist. I mean seriously how hard could raising children be? Again young. And of course in reality studying was a blissful break from domesticity – not the other way around.
One of the super perks of studying was the Student creche. Super high quality childcare; very reasonable pricing and super flexible. Why sure Andrea: Tuesday 10-1; Thursday 3-5; and all day Friday is completely fine. Please pay by the hour. One child or two?
And at that creche there were two types of mothers – yes mothers; men appeared only occasionally. There were the middle class married women – like me – late twenties early/ mid thirties doing post graduate work or retraining and then there were the late teens/early twenties single women who were at university for the first time.
The young women had a number of things in common:
- Straight A students;
- Determined and resourceful;
- Highly motivated; and
- Dirt poor.
The other thing they had in common is that pretty much all of them were lying to WINZ in some form. Part time undeclared untaxed income was very common as was parental financial help. I don’t remember extra flat mates but I am sure that was in the mix. Because resourceful.
But all of this just meant that they could have their kids nits treated as I did, pay rent and eat. Although I do remember one of them brightly telling me that just eating potatoes for a week was an easy way of managing when unexpected bills came in. Right ok.
So in other words they were all Metiria. And the actual amounts of money involved were absolutely trifling. $20 or $30 a week max for a relatively short period of time. But it was the difference between sinking and not sinking. Swimming didn’t come into it.
Of course this was when there was a training incentive allowance to help with creche fees. And while it was post Mother of all Budgets the relative value of the welfare system was more than it is now. So I guess the current generation of young women just don’t go to university. Social Investment anyone?
And from time to time I run into them. Also like Metiria they are now professionals, (re)partnered and have other (step) children. Taxpaying, respectable pillars of society.
Now into this discourse has come Lisa Marriott’s seminal work on how we as a society treat tax evasion v welfare fraud. And I have nothing to add to this. Coz yup she is right. Nailed it.
But the two things I would like to add to the conversation – assuming there still is one now Jacinda has arrived – is a bit of a comparison with how we treat tax debt and how we treat widespread tax non-compliance.
In the early days of the last Labour government changes were made to the rules governing tax debt. Basically the intent was to get the department to calm the F down in terms of collecting tax debt. The rules were changed so that debt will not be recovered if it:
- is an inefficient use of the Commissioner’s resources or
- would leave a taxpayer in serious hardship.
And note the all important or. Not only should the Commissioner not pursue debt when there isn’t a bang for the buck but even when there is – if it would be unkind. At least these are the rules that apply to Working for Families overpayments.
But looking at some of the cases taken by WINZ, clearly these criteria are not in their legislation.
The other thing that made me realise how differently tax is treated to welfare are situations where there is widespread non-compliance. Either through a misunderstanding with how the law applied; wilful blindless; or a desire to put the past in the past; the law can be changed to make the illegal legal. And at times retrospectively.
Because they are doing it already; not in the forecast; can’t audit our way out or taxpayer friendly. The latter of course meaning friendly to specific taxpayers rather than friendly to taxpayers as a whole. Examples include:
- GST registration for body corporates was made optional. Of course meaning will only register if can get refunds;
- Use of tax pooling was allowed in circumstances that weren’t previously allowed for in the legislation;
- Canterbury Earthquake employee accommodation allowances were specifically made tax free;
- crews on super yachts income was made tax free;
- The contingent liability associated with conduit relief was extinguished.
Now these are just a few examples. Most tax bills contain versions of these. And all have good reasons behind them and help make the tax system breathe. I am comfortable with – pretty much – all of them.
But all were at some stage against the legislation. In all cases, at some stage, some people were ‘incorrectly’ on the wrong side of the law. Usually individually or cumulatively with quite large amounts of money at stake. Far more than a trifling $20/ week.
But rather than ruthlessly enforce the ‘incorrect’ legislation; the legislation changed. It changed following representations made to Ministers and officials by affected parties. In the same way I see welfare advocates make similar representations. The only difference is that the tax advocates get listened to. Because structural imbalances.
So even though tax and welfare are mirror images of each other, this is another case where public policy talks out of both sides of its mouth. And unfortunately as there is little or no overlap between the two worlds; joined up government just means easier detection of welfare discrepancies.
Now finally in case I have been a little too subtle:
To all the people baying for Metiria’s blood – did you ever do babysitting; lawnmowing or car washing when you were younger and not put it on your tax return? I know that is me.
Well that is what tax evasion looks like. We committed a tax crime. We lied to Inland Revenue. FFS #WeareallMetiria.
Should we fall on our swords. No. We should get on with our taxpaying lives. And section 176(2)(b) – the bang for buck provision – quite correctly stops the department from chasing us.
Shame the same approach can’t be taken to Welfare.
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.