Friday: talking about the taxman.

This morning, as I did the lectionary, I thought to myself — nothing much to talk about with finances. Then my son phoned me and said the government has passed, under urgency, an increase of taxation — at a new top rate of 180 000 NZ. That is 90K pounds or 120K US, for the rest of you.

David Seymour is wrong about euthanasia but correct here.

“Finally released detail of Labour’s proposed tax increases shows officials don’t think it will work, describing revenue estimates as ‘highly uncertain,’” says ACT Leader David Seymour.

“It’s also no surprise the Government has signalled it will increase the rate it taxes trusts to 39 per cent if it finds people are finding ways to avoid the new 39 per cent income tax rate.

“Unintended consequences of tax changes nearly always outnumber intended consequences. We know from history that over time this will result in fewer highly-skilled people wanting to come here, and more highly skilled people wanting to leave for more attractive jurisdictions.

“It’s also clear the way Labour is changing the law will deliver a huge blow to the integrity of the tax system.

“The percentage of income collected compared with the percentage of rates levied will get worse, which means more avoidance activity, a leakier tax system, and more time running round on expensive administration and compliance.

I found more details about this. As usual, our doofus government has decided they need people to provide more information. We are thinking of trusts as a means of succession planning, but the burden for this is going to be huge. And Inland Revenue have, in my experience, no sense of humour.

What Inland Revenue is going to ask for now is profit and loss statements, balance sheet items and other information as specified by the Commissioner. For example, they might be wanting to know transfers to the trust by an associated person. Inland Revenue will also want information on distributions made during the year. Now, in addition to that, the powers of the Inland Revenue have been increased to allow the Commissioner to request the same information in relation to distributions financial statements, et cetera, for prior tax years, going back as far as seven years.

Not every trust will be required to provide this information, but this measure is to address what Inland Revenue regards as an information deficit relating to earlier years. And this is the integrity measure they’re going to be paying most attention to, because the information for those earlier years will, “assist in understanding and monitoring the changes in the use of structures and entities by trustees in response to the new 39% rate.”

So this is quite a significant development, and obviously what they’re looking to do is to counter people washing income through trusts. That is income that, if received by an individual, would be taxed at 39%. But because it’s taxed in a trust at 33%, if the trust is a complying trust, it can then distribute that income tax free to because it’s already been taxed to various beneficiaries.

So Inland Revenue and the Government are going to track what patterns have happened in the past and what patterns change, and that is how they will then apply the anti-avoidance rules to attribute that income to the individual rather than be taxed in the trust.

This is certainly one measure they’re going to take. But if they see a lot of it going on, it appears they won’t hesitate to actually go ahead and increase the trustee tax rate to 39%.

Now, both of these measures are going to increase the compliance costs for all trustees. So be aware that your costs are going to increase. And I would recommend to clients to be reviewing practices in prior years to ensure they have the records and ensure that there is a consistency of approach to distributions over the next few years and these are consistent with previous practices because that’s what Inland Revenue be looking at.

The bill also increases the top tax rates for various other taxes that would be affected by a tax rate change, such as Fringe Benefit Tax which will go up to 63.93% if fringe benefits are supplied to people earning over $180,000. There’ll be an increase in the resident withholding tax rate to 39%, but that will only come into effect on 1st October 2021 in order to allow the institutions time to change. And there will be an increase in the extra pay rate for lump sums to 39%.

And that leads onto the final point in today’s bulletin, and that is that the increase in the tax rate magnifies a problem that exists already in the system, and that is the treatment of lump sum payments such as bonuses, back pay, redundancy, retirement payments or ACC arrears together with payments of large lumps of income, such as foreign superannuation scheme withdrawals.

There’s now a reasonable chance that some or all of these sums would be taxed at 39%, even though if you look at the person’s average income in normal years, their marginal tax rate would be below 39% or even below 33%. Now, this is a long-standing problem with the tax system which does not take into account average tax rates on earnings in relation to lump sums. It particularly affects people on PAYE.

This is a well-known issue which Governments have been told about and they’ve just ignored the matter. It’s an issue which re-emerged earlier this year with the application of these rates to redundancy payments in the wake of Covid-19.

Well, we need to review our budget and tighten it anyway. I should be glad I’m on a salary. But the casual spend — the coffees, the lunches together… will stop real soon. I expect the more highly paid groups, like specialists and senior public servants, to increase their salary claims in the coming award round (in 2021) to compensate. Most of these are highly employable at about twice the salary in Australia, once the COVID scare ends.

In the meantime, keep your financial records on paper or in a spreadsheet. Cloud based accounting systems (Xero is the most used one in NZ) are not private. Rodney Hide notes about a mate who inland revenue hounded into bankruptcy: (redacted a little)

The Official Assignee initially asked Xero for [his mate’s wife] username and login. Xero couldn’t do that but gave the OA a spreadsheet with 250,000 transactions on it. That was everything. Xero subsequently updated the spreadsheet. The spreadsheets included tens of thousands of deeply personal records over many years including medical bills and the like.

Xero never told Kristina about the request or their release. Indeed, Xero initially denied the release and only confessed when confronted with incontrovertible evidence.

And as for staff having a peek? Xero’s lawyer justified the dump by declaring to the court: “[Kristina’s] supermarket transactions seemed far too high to be personal”.

There was no court order. There was no legal demand [the OA’s power to gather information only relates to a bankrupt’s property, conduct or dealings].

Xero released a client’s entire financial history to the state simply upon being asked. We don’t know how often it happens. We can’t trust Xero’s assurances. Their initial response was to deny the dump.

The court case this week was preliminary. Xero is asking the court either to strike the claim out or to issue summary judgement.

Whatever the outcome, we now know the facts: Xero has released a client’s entire financial history to a government department that simply asked.

Xero is an app. Be careful on what apps you use.

I could not link to this comment, (not me) but it is a fair warning.

Make sure to look at who owns the app before you dive in. Mint, for instance is an Intuit company, which has shown some wokeness in the past. Why is this an issue?

Because Mint, as well as one or two others I looked into insist on getting their grubby fingers on your bank account credentials. No one, but no one gets those from me. I like this one: http://www.mhriley.com/spendingtracker/manual.html

It’s worth it for me to manually configure my tracking app, and keep it separate from my accounting.

Then again, I have a CPA wife, who does the budgeting. We worked out what to spend each month for what category – food, house, dogs. I plug those into the app which feeds her data.

I was going to quip about budgeting with a wife. But maybe I need to buy the book and read it first.

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Amy
Amy
3 months ago

Dave Ramsey has good books in regards to budgeting with the wife. 🙂

Also – nasty system of trusts you have there. Here trusts are a (underused) way to pass property painlessly from generation to generation. Have been a beneficiary of two, they’re lovely. Not just the taxes (which for normies aren’t too hideous) but the simplicity. I am annoyed upon your behalf at that being taken away.

John Wilder
3 months ago

And the consequences of fewer lunches and coffee? Lower revenues for businesses.

So, we’ll need to raise taxes, again, right?