After leaning over the 143-page discussion paper on the interest limitation proposals over the past few weeks and have discussed them with colleagues, the summary position I have come to is that the government should be very aware that there will be unintended consequences, and it should therefore be ready to refine its proposals.
In particular, two problems seem to emerge. One is that interest limitation rules and proposals to allow accrued interest on new bills may mean that the trend that worried first-time homebuyers is crowded out in favor of developers and investors with access. to many assets and therefore the leverage is likely to accelerate.
Developers and investors are able to outbid first-time home buyers for plots of land or vacant buildings where a single house could currently exist but could be converted into two, three or more units. Since under the new construction proposals, interest deductions will continue to be allowed for the construction of additional housing, the likelihood that first-time home buyers will be able to purchase vacant land, construct a building, and move into it. will probably be reduced. They will simply be outbid by those who have access to better access to finance. And I think that this tendency will be accentuated by these proposals.
This is probably not an intentional consequence, but as with taxes everywhere there are often unintended consequences at play and the housing market is likely where the unintended consequences of decisions made 30 years or more ago have now imposed themselves. .
And the other unintended consequence, I think, is going to happen, is that the burden of these proposed changes will fall on a group that is not really its target. And they’ve also proven to be the least equipped to handle the level of detail and compliance expected. And this group here is what we call the mom and dad investors, people who have one, maybe two investment properties that represent their retirement funds.
This is a group of people who are not really the government’s target, it is not the big investors who have been able to significantly leverage and outbid the first-time homebuyers. These are people who have decided to buy investment property for their retirement. Or it could be that a couple has formed a relationship and they have moved into one property and rented out the other property,
Whatever their circumstances, this is a group that will face a significant amount of compliance going forward, and for very little payoff to the government, I would add, either politically. or in terms of improving the housing market.
It seems to me that the government should seriously consider an exemption for such a group. Perhaps to say that the owners of an investment property are exempt or that the rules only apply above a certain threshold.
Currently, the average rental income in the country is around $ 25,500 per year. Maybe if the gross rental income is, say, $ 30,000 or less, the rules won’t apply.
Alternatively, if the government still wishes to remove this tax anomaly of a full interest deduction for a partially untaxed return in the form of capital gains, then it could say that only 50% of the interest is deductible. By the way, that was something from a previous guest John Cantin suggested could be an option. It would be a simpler option.
What was interesting when dealing with the discussion paper proposals is that while the concept of denying interest deductions seems simple in itself, what was really telling is the level of detail we had to work on, in particular with regard to the exemption relating to new constructions.
The complexity means that tax officers like myself, other advisers and individuals are now at a greater risk of making incorrect tax returns, such as incorrectly calculating the amount of interest deductible. Greater complexity means a greater likelihood of something happening and a customer suing for negligence. Professional liability insurance premiums may increase accordingly.
But anyway, advisers and those affected by this would want the government to give serious thought to making the proposals less onerous from a compliance standpoint.
Closing of submissions on Monday 12. As I said earlier, be constructive with your submissions. The government is not going to listen to people complaining that this is woefully unfair. It is a fact of life. So be constructive in your submissions. These submissions will be reviewed by Inland Revenue, and we will know more in about four to six weeks when the final form of the proposals is released with the bill. It’s a tight schedule because it’s all supposed to be in place by October 1.
Social benefits tax
Then, the question of bicabines and FBT returns in the press with the Minister of Revenue, David Parker, saying he envisioned a crackdown on tax rules relating to social benefits. He apparently received advice on how twin taxis were taxed and confirmed that he was considering acting on it.
The Inland Revenue advice was that there is no exemption for twin taxis, which I mentioned earlier. And that’s correct, although there is a popular belief that there was. What Inland Revenue believes is that the existing rules are not being properly enforced, which is also my conclusion.
The astonishing thing, however, is that the Inland Revenue went on to say that it was not so keen to pursue this case because it would not make a lot of money. David Parker said, citing: “Inland Revenue has informed me that this is not such a big issue compared to other enforcement priorities. But we are looking at the problem because they are proliferating.
There are two points to make about this. First, the Inland Revenue has an obligation under article 6 of the Tax Administration Law of 1994 “to protect the integrity of the tax system”. including people’s perceptions of the integrity of the tax system.
So a public statement that he really didn’t feel like this was a big deal sends the complete wrong message about enforcement to myself and other tax advisers and those conscientious taxpayers, the vast majority of whom want follow the rules. Inland Revenue basically says, “Well, we don’t really mind that”. In the context of an annual tax of $ 85 billion, saying an additional $ 100 million per year may not be that important, but it does nothing for the integrity of the tax system to say it.
The other thing here that David Parker has pointed out – he is also the Minister of the Environment – is that climate change policies are undermined by not enforcing the rules about double taxis. These are high emission vehicles and the Rated Productivity Commission we import vehicles with higher emissions compared to what is available in the rest of the world. In other words, New Zealand has become a bit of a dumping ground.
And so if we tackle emissions, reducing emissions is a continuous job and in that context, not enforcing the FBT rules makes that job more difficult. Transportation emissions is one area where New Zealand can make progress in reducing its emissions. Leaving aside the issues of reducing methane emissions from our agricultural sector, we can certainly do more to improve emissions from the transportation sector.
So it will be interesting to see how it goes. I think Inland Revenue will raise the stakes on this. Get any group of tax advisers together and we’ll all have stories of some of the abuses we’ve seen. Like Inland Revenue photographing or sending someone to look at boat ramps and popular boats on weekends, just to see if an alleged company vehicle was in private use. Apparently one of those boat ramps in Gisborne was across from the Inland Revenue office and a business, after a few weeks, got a call from the Inland Revenue asking if in fact , it correctly declared the FBT.
Transfers as “dividends”
Moving on, Inland Revenue this week released a number of interpretive statements that give its take on how the law works. One that people should pay special attention to is Interpretation statement 21/05 on non-monetary dividends. Now that takes into account when a transfer of value from a company to a shareholder is treated as a dividend for tax purposes. These are sometimes also called deemed dividend rules.
In my view, the interpretive statement aptly focuses on the type of non-cash transactions that are often entered into between small and medium-sized businesses and their shareholders. Now sometimes FBT recovers some of these issues but other times it doesn’t. A common example of a non-cash dividend would be a loan from a business to a shareholder.
The interpretive statement therefore presents a number of examples of how these rules might work. For example, there is a banana company that supplies one of its shareholders with a large number of fresh bananas. It’s a dividend. Another example would be the shareholder who owes the company money and the company cancels the debt. It is quite another when a dividend or a telecommunications company provides telecommunications services free of charge to one of its shareholders.
The interpretive statement works through various scenarios like this and clarifies what dividends are as well as the rules for calculating the dividend and when the dividend is deemed to have been paid.
It is in fact a very valuable document. It is also quite astonishing to realize that this is actually an update of a previous article on deemed dividends from March 1984. I know the Inland Revenue has a lot to do, but it’s a little surprising to see it take 37 years to update this kind of topic.
Either way, the interpretive statement is there. So people should be more aware of this deemed dividend issue. This obviously indicates that this is one of the areas examined by the Inland Revenue. In fact, they have been very interested in the area of shareholder advances, that is, corporate loans to shareholders for some time. This interpretative statement should therefore serve as a warning.
Okay, that’s all for today. I am Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thanks for listening and please send me your comments and tell your friends and customers. See you next week ka kite āno!