Where is this going?

On 2nd December 2020, legislation was introduced by the Government that increased the top personal marginal tax rate to 39% on income over $180,000 from the start of the 2021/22 income year.

Three other changes were included in that legislation. It introduced:

  • new information-gathering powers for the purpose of tax policy development,
  • a new requirement for most trusts that derive assessable income to prepare financial statements, and
  • increases the information that trusts must disclose as part of the income tax return filing process.

This legislation was enacted under urgency and did not go through the usual consultation process. At the time, David Parker signaled that if trusts are being used for the sole purpose of paying a lower tax rate “we will move on it”.

Fast forward one year and three things have happened.

Firstly, Inland Revenue has initiated a research project in which it is examining the lives of 400 New Zealand taxpayers worth in excess of $20m to estimate their effective tax rate on economic income (which is broader than taxable income).

A range of information will be demanded for the 2016-2021 income years including details of partners and dependants, significant personal assets (how much they cost and the date acquired), real estate interests, details of companies and trusts, and other financial flows.

This information is being demanded under the new legislation referred to above, with requests separated into three tranches due in November 2021, January 2022 and May 2022, each delving further into the lives of these taxpayers to enable Inland Revenue to measure the ‘households’ total income. The results of Inland Revenue’s research project will be released in an anonymised form in mid 2023.

Secondly, on 15th October 2021 Inland Revenue released an Officials Issues Paper seeking feedback on what level of detail should be required within a trust’s financial statements pursuant to a future Order in Council. A draft operational statement was also released by Inland Revenue on the same day which proposes how the new information gathering
powers will apply to trusts. Based on the draft statement the following types of information will need to be submitted each year:

  • a statement of profit or loss and a statement of financial position,
  • details of taxable and non-taxable distributions and who they have been paid to, and
  • the nature and value of any settlements onto a trust, and who a settlement has been made by.

The third element to factor into this picture is that the increase in information to be provided is occurring at a time when Inland Revenue has
implemented a new IT system that provides them with an unprecedented ability to analyse and manipulate data.

During the build up to the general election in 2020 Jacinda Ardern ruled out Labour bringing in a capital gains tax under her leadership. However, as the new information that is being gathered is analysed, it might reveal a segment of income being used for the necessities and luxuries of life that have not been taxed; which could open the door for a generational change to the basis on which income tax is levied.

New Tax Legislation

On 9 September 2021, the Government introduced the Taxation (Annual Rates for 2021-22, GST and Remedial Matters) Bill (“the Bill”) into Parliament, containing over 100 tax amendments. Changes of note are summarised as follows.

One significant amendment is in relation to purchases from associated persons. Under current law, if a GST registered person (‘the purchaser’) acquires second-hand goods from an associated person who has not used them to make
taxable supplies, and that associate originally purchased the goods from a non-GST registered person, the purchaser’s second-hand goods deduction is zero. This has been a frustrating and illogical rule that has caught out numerous taxpayers over the years – they will know who they are. In what is an arguably overdue amendment, it is proposed that the purchaser (in the above situation) will be allowed to claim an input tax deduction equal to the tax fraction of the original purchase price of the associated person.

When the top marginal tax rate increased to 39%, there was a flow on increase to the default FBT rate from 49.25% to 63.93%, which has meant employers applying one of the default or short form options are arguably overpaying FBT in the first three quarters. Under the proposed new pooled alternate option, employers would only pay FBT at the increased rate for employees with all-inclusive pay of $129,681 or more, which generally equates to employees that are subject to the top marginal income tax rate (i.e. for employees that earn over $180,000). On the other hand, FBT would be payable at the 49.25% rate in relation to employees with all-inclusive pay of under $129,681 (i.e. employees that earn less than $180,000). Consequently, this should prevent employers from overpaying FBT during the year.

Reflecting how complex the residential bright-line provisions are becoming, the Bill also contains further refinements to these rules. For example, one amendment proposes that where a main home takes longer than 12 months to construct, the construction period will continue to be treated as “main home days” for bright-line purposes.

The average person may not realise that sales suppression software exists. However, this is a key point of contention for Inland Revenue, as this software alters point-of-sale data to manipulate revenue – facilitating tax evasion. While not necessarily commonly used, Inland Revenue considers the spread of such software to be a major risk to the integrity of the tax system. Thus, criminal and civil penalties of up to $250,000 are being introduced for the supply or possession of such software.

Finally, in what seems to be the end of an era for ‘baby boomers’ and late adopters of technology, fax as an approved method of communication with Inland Revenue is being removed.

Challenges & Opportunities in a turbulent Job Market

In the middle of a pandemic, it can seem at times that the grass is greener elsewhere. Almost two years into a global health crisis that many could not have imagined in their lifetimes, the concept of lockdowns, working from home, a fading connection to the workplace, and the overwhelming feeling of burn-out is driving a surge in resignations in many countries.

With a record number of employees resigning during 2021 in the United States, recent media coverage suggests New Zealand may be heading down a similar path with an uplift in job vacancies being reported.

Several factors are at play in this turbulent job market.

Firstly, as the economy grows out of the pandemic and labour shortages impact many industries, employees are now in the drivers’ seat when negotiating their working conditions. Memories of how some employers treated their employees at the height of the pandemic are still fresh. These experiences have reinforced to individuals the importance of family and financial security.

Hence, with the roles now reversed, employees are driving negotiations for better pay and perks to achieve financial security, while also seeking a better work life balance to prioritise family. Workplaces that fail to identify the changing landscape of employee needs risk facing high employee turnover.

Secondly, while thousands of Kiwis rushed home as the pandemic surged in 2020, with border re-openings now in sight, a wave of young professionals ready to embark on the infamous Kiwi OE is expected to leave behind a list of vacancies.

The accounting profession does not need to look far. Pre-covid, the ‘Big four’ accounting firms were accustomed to the trend of newly qualified Chartered Accountants (CA) leaving for the bright lights of Europe and the United Kingdom. With the pandemic impacting these plans, hundreds of recently qualified CAs are likely planning a European summer in 2022.

Resignations and higher turnover have a direct impact on business productivity. Having survived a pandemic, businesses now need to adapt to retain employees to thrive. Retaining staff is about offering opportunities of growth, training, and flexibility between work and personal life.

If employees can see a business adapting to their needs and recognising their contribution, they might realise that greener pastures are still at home.

Clarity for property investors

In March 2021 the Government announced changes to the bright-line test and interest deductibility for residential properties.

Following the release of a discussion document in June, there has still been significant uncertainty regarding the specific details of how the new rules will apply. However, the government has now provided clarity through the release of draft legislation on 28 September 2021.

For the purposes of the legislation, a new term has been coined – “disallowed residential property” (DRP), which refers to those properties for which interest deductibility will be affected.

DRP’s purchased before 27 March 2021 will have their interest deductibility phased out between 1 October 2021 and 31 March 2025, while those purchased on or after 27 March 2021 will be wholly denied the deduction from 1 October 2021.

However, if a property has had a code compliance certificate (CCC) issued on or after 27 March 2020 it will qualify as a ‘new build’, in which case interest will remain deductible.

The date of 27 March 2020 is one year earlier than expected. Properties that qualify as social, emergency, transitional or council housing will be excluded from the interest limitation rules, regardless of their new build status.

It is also proposed that if interest is treated as non-deductible, but the property is sold and the sale is taxable under the brightline test, then the previously denied interest deductions are able to be claimed as a cost thereby reducing the taxable profit on sale.

A key question in recent months has been how long interest deductions will last for new builds.

As per the draft legislation, interest on new builds will remain deductible for 20 years from the issue date of the CCC. Furthermore, interest will remain deductible for subsequent owners throughout the 20-year period, abandoning the potential requirement of being an ‘early owner’ outlined in the June discussion document.

A previous amendment extended the bright line period to 10 years for residential property acquired on or after 27 March 2021. However, new builds purchased on or after 27 March 2021 (one year later than the relevant date above for interest deductibility) remain subject to a 5-year bright line period.

Unlike the interest exemption for new builds, the new build bright line period of 5 years does not apply to owners that purchase the new build more than 12 months after the CCC has been issued. Therefore, in general, subsequent owners will not get the benefit of the shorter 5 year period.

In a welcome and unexpected development, limited rollover relief for certain transfers to trusts, LTC’s, partnerships and individuals will be introduced. This will allow property transfers to take place without triggering the bright-line test where there is no economic change of ownership.

The above is a summary of the key features of the legislation. However, the legislation itself is a lot more complicated due to the large number of varied situations and permutations that must be catered for in practice.

Despite the answers the draft legislation has brought us, it is apparent that navigating the rules (both new and old) will prove complicated and fraught with risk.

Cryptocurrencies – Are they on your radar?

Cryptocurrencies have been garnering worldwide attention recently, particularly with Bitcoin’s dramatic rise to over NZD$90,000 for a Bitcoin in April 2021, and its subsequent 50% crash through May and June.

Other cryptocurrencies, deemed ‘altcoins’, have also seen similar price volatility. These coins adopt the same principles as bitcoin, with slight changes and tweaks to differentiate them. ‘Dogecoin’, featuring a dog as its logo, saw a 12,000% increase this year, propelled by tweets from Tesla founder Elon Musk.

Clearly, some people are making large amounts of money in this space, and the Inland Revenue does not want to miss out on its share. Inland Revenue has released various forms of guidance on the topic of ‘crypto-assets’, which encompasses cryptocurrencies. Crypto-assets is defined as “cryptographically secured digital representations of value that can be transferred, stored or traded electronically.”

Effectively, cryptocurrencies provide a decentralised platform for transactions to take place. Each holder of the cryptocurrency has a ledger on their computer which updates as transactions take place. This network of ledgers is referred to as a ‘blockchain’. There is no one central entity, as the system relies on each ledger agreeing in order to verify transactions. This bodes well for security, as hacking the ledger on one computer will not affect the blockchain as a whole.

This process allows for cryptocurrencies to be used as an alternative form of currency, without the need for government monitoring or intervention. Bitcoin transactions are confirmed through a computationally intensive process called ‘mining’. Those who are willing to invest in the hardware to ‘mine’, are rewarded with bitcoins over time, adding to the overall supply of bitcoins. The supply of bitcoins is limited to 21 million, with 18.7 million currently in circulation. The last bitcoin is expected to be mined in 2140.

The tax guidance on crypto-assets is varied and somewhat contradictory. In general, crypto-assets are treated as a form of property for tax purposes. Individuals are liable for tax in the following circumstances:

  • acquiring crypto-assets for the purpose of disposal,
  • trading in crypto-assets, and
  • using crypto-assets for a profit-making scheme.

However, when salary, wages or bonuses are paid to an employee in the form of crypto-assets, PAYE applies. Furthermore, FBT may apply if employees are offered conditional crypto-asset payments by a company that issues crypto-assets. This leaves a situation where the IRD is treating crypto-assets as either property or currency depending on the situation. This is not surprising given the complexity and varied nature of crypto-assets; making an all encompassing treatment near impossible. For this reason, Inland Revenue is also proposing that the GST and financial arrangement rules do not apply to crypto-assets.

This year El Salvador made bitcoin legal tender, and we are seeing more stores accept cryptocurrency as payment. However, the extreme volatility associated with crypto-assets makes their use as a currency unreliable for the time being. Clearly, the market is not to be underestimated and we can expect further guidance from Inland Revenue as things evolve.

Paid parental leave for who?

Earlier this month, the Government released Budget 2021. Included in the budget was a boost to all main benefits, including an increase to paid-parental leave.

From 1 July 2021, eligible parents will be entitled to a maximum of $621.76 a week (before tax), an increase of 2.5% on the prior rate of $606.46.
While the monetary increase is no doubt welcomed, a recently released UNICEF report suggests that New Zealand’s child-care policies remain inferior among OECD countries. The report ranks New Zealand in the bottom third of “rich countries” after accounting for the duration of paid leave available, access, quality and affordability of childcare.

Despite the report being based on 2018 data, hence not accounting for subsequent increases in paid parental leave available in New Zealand (18 weeks to the now 26), New Zealand is still significantly off the pace, with the average length of paid leave across OECD countries nearing 55 weeks.

The report also hints that internationally there are inequalities in maternity and paternity leave, suggesting that whilst leave typically provided to fathers is significantly shorter, it is also often paid at a higher rate. At a time where work environments are ever-changing, alongside the diversifying role of parents, a global push for parental policies that adequately reflect the changing environment are increasing.

The introduction of France’s revived paternity leave policy came into effect on 1 July. It provides 28 days paid leave to fathers, or second parents, of both biological and adopted children. The initiative comprises 3 days of birth leave funded by the employer and an additional 25 days paid by the state, 7 of which are mandatory. Employers that fail to acknowledge the 7 mandatory days are liable for fines of up to €7,500. Global firm Cyient also recently announced their gender-neutral parental leave policy. The policy provides parents of any gender, up to 12 weeks paid time off at their full pay. The policy applies equally to birth and adoptive parents.

Closer to home, 2degrees recently committed to topping up government contributions up to 100% of an employee’s base salary for the 26-week paid period.

Despite many additional examples of more extensive parental leave policies being put in place, it is unclear how effective the new initiatives will be, particularly amongst new fathers.

Japan currently offers one of the lengthiest paternity leave policies, with fathers entitled to up to one year of leave following the birth of a child. Yet, in 2019 only 7.48% of men working in the private sector took paternity leave compared to 83% of women; and in some ways it’s not hard to see why. Historically, parental leave initiatives have been solely based on women being the primary caregiver, with parental leave for men an afterthought.

Maternity leave for the private sector wasn’t legislated in New Zealand until 1980 and it wasn’t until 7 years later that the Act was extended to include men, giving them exclusive use of two weeks of unpaid leave. In contrast to the global shift towards gender neutrality, men in New Zealand technically still have no entitlement to paid parental leave in their own right, although they may be entitled should the mother transfer hers.

It is evident that countries and corporations alike are seeking to advance parental leave policies, however, the uptake rates are likely to remain influenced by societal and corporate expectations surrounding caregiving. Nevertheless, the introduction and revision of policies by numerous global players has undoubtedly started a broader conversation which seeks to challenge entrenched traditional gender roles.