Tag Archives: timebar

PIEs, timebar and tax fairness

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

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

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

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

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

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

Portfolio investment entities (PIEs)

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

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

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

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

So it was all a bit of a hot mess.

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

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

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

Happiness all round.

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

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

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

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

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

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

Time Bar

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

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

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

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

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

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

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

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

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

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

Andrea


(1) Section 6A(3)

(2) Section 108

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