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Budget 2010 - Our Opinion

21st May 2010

Bill English presented his second budget yesterday and whilst a lot of people guessed what could be in there it still contained some surprises. At Budget Tax Returns we are impressed with the budget that has been delivered and the measures that have been implemented to make the tax system fairer and to take New Zealand forward into growth and to a more successful future. We congratulate Bill English on the steps taken and delivering a good result for everyone.

It is amazing that the Labour Party have come out against the budget and focused on their view that the rich get more than the poor. If they are so concerned about it why are they prepared to take the tax cut and pocket the money? Why don't they show what they mean and donate the tax cuts received to the poor or charities that support the poor. No they are not that brave or critical but instead being vocal with no substance behind them.

Tax Reform
National wanted to reform the tax system to make it fairer to everyone and to stop the rorting of the tax system by people investing in property. We are of the opinion that this has been achieved although we do need to recognise that there are some people who will be far from happy particularly those who have invested in property. With the changes made it is likely that the manipulation of incomes that accountants perform for their clients will not be as wide ranging as they are now.

If we are to be critical of the tax reforms it is the decision to reduce the Company tax rate in the future down from 30% to 28%. It is our opinion that this is a mistake and simply a case of New Zealand trying to follow Australia. This one change on the surface of it would be great but it allows us accountants to restructure our client affairs into companies and therefore potentially not reap the level of taxation that the Government expects. This is something that the Government will need to watch very closely and do not be surprised if there is some tightening up on restructuring of affairs in the future to ensure that the manipulation does not occur.

The loss of depreciation on buildings is well justified and something that has been a real concern of ours for sometime now. Lets face it most buildings do not depreciate like the tax system had been allowing. Congratulations to the Government for taking this bold step. Yes there will be property owners affected and we do have to feel for commercial property investors as they will struggle with the changes made. They are the ones who suffer the most as the depreciation was at least making some commercial investment attractive. The loss of the claim for them is going to make it tough. On the other hand the loss of depreciation for residential investors is well justified and may make people think now about why they are making a residential investment particularly if they are highly mortgaged. It is our expectation that we are going to see a number of people quitting their investments because the depreciation claim was providing the cash they needed to fund the mortgages. Yes it is harsh on some but something had to be done and it is good to see the Government finally taking action.

The changes to the loss attributing qualifying company regime is an interesting one and could this spell the end of the LAQC regime and a move to the limited partnership regime given that they are now basically one and the same. The Government has it consultation paper out already and makes for some interesting reading. Should the Government have attacked the LAQC regime like it did? Lets face it they had no real other alternative but to do so and to hit it hard. However there are some businesses which have legitimate reasons for having a LAQC and they are being punished. These people will be very few and the reality is that the LAQC regime was being abused for residential rental properties. If you are one of the affected ones we suggest you read the discussion paper and talk to your local MP and Government about it.

Early Childhood Education
If there is one big loser out of the budget it is the Early Childhood Education sector and it is very disappointing to us that the Early Childhood Council do not realise the impact that it has. They say they have mixed emotions and the quality won't suffer - we say rubbish! It is good to see that the New Zealand Educational Institute has come out and said what the true situation will be.

If a centre achieves more than 80% qualified staff they lose Government funding but if they have less than 80% they get Government funding. So what is there to stop centres employing non-qualified staff to look after the children? At this stage nothing and there is no incentive for a centre to try and achieve a high percentage of qualified staff. In our opinion the Government has been very short sighted and we would go as far as saying that they are being dumb. Surely New Zealand wants to ensure that children get the best start if life and by having qualified teachers they will get that. It will be interesting to see how the Minister of Education can justify this very poor decision in the budget. It is interesting to see that no big announcement was made about it but instead that the Government has tried to hide it.

Not only is there potential for "dumb" staff to be teaching our children but parents are more than likely going to be hit in their pockets. Not only do they get extra GST on their preschool fees but the preschool either has to absorb the loss of funding or pass it onto parents. We doubt that centres will absorb the cost and so parents are going to have to pay more. Be interesting to see what level of increases there are for each centre but it will be significant. We therefore ask the Minister of Education and Minister of Finance to guarantee that the comment people will be better off under budget will still apply when the preschool fees increase. We cannot see that they offer this guarantee and parents with preschoolers are likely to be worse off as a result.

Overall Conclusion
We are happy with the budget overall and the initiative taken by the Government. The key now is for New Zealand to perform and achieve the goals set out by the Government. Lets hope we can do it especially in light of the economic crisis the world is facing and the meltdown in Europe.

 

Trade Me Continues To Be Target For IRD

8th March 2010

On 8th June 2009 we reported that Inland Revenue were monitoring traders on Trade Me as many people were earning tax free income. Since our report on that date Inland Revenue have so far collected nearly $1.2 million in unpaid taxes. We congratulate Inland Revenue on taking this step. It is unfair on salary & wages earners for them to pay tax whilst these online traders don't. It is this sort of activity that undermines our entire tax systems and results in hard working kiwis paying more tax than they should on their wages & salaries. We strongly urge Inland Revenue to continue their investigations and tax all online traders who are selling with the intention of making a profit. Those people who sell the item they no longer want should be safe from any Inland Revenue investigation.

If you are a active trader on Trade Me and are doing so to make money you should be contacting us ASAP so that we can assist you with any potential tax obligations that you may have. Don't delay - act now and front up to IRD.

 

Tax Working Group Final Report

20th January 2010

The Tax Working Group (TWG) formed to identify major issues with the New Zealand tax system. have issued their final report (available here) and recommendations. It is refreshing to see that finally recognition has been made that our tax system is flawed and changes are needed. We have known this for some time and there has been clear evidence that this was the case. Hopefully we see Government take the initiative and make the changes that are required.

The Tax Working Group has made several recommendations of which keys ones are:
  • Increasing the GST rate from 12.5% to 15%.
  • Low-rate land tax as a means of funding other tax rate reductions.
  • Aligning the company, top personal and trust tax rates.
  • Make the New Zealand company tax rate competitive with other countries particularly Australia
  • Top personal tax rates of 38% and 33% should be reduced and ideally a across-the-board reduction in personal tax rates.
  • Broaden the base upon which the tax system operates so as to address some of the existing biases and to achieve reduction in company and personal tax rates; and
  • Removing tax depreciation on buildings (or certain categories) where empirical evidence shows that they do not decrease in value.


    • We at Budget Tax Returns are reasonably happy with the recommendations made by the TWG and are particularly pleased that a recommendation has been made that depreciation on buildings needs to be looked at. Quite clearly they were looking at those rental property owners who gain an unfair tax advantage by claiming depreciation when the reality is that the value of their asset does not reflect the tax value. Targeting this is better than targeting the LAQC regime that many property owners hold their property under. To do so would adversely effect those who are registered as a LAQC for other legitimate reasons. The big question is will the Government have the courage to implement such a change or will they defer the decision for sometime. The TWG are of the view this change would be relatively easy to implement and we would like to see this implemented immediately with effect from 1st April 2010. There is no point waiting around or continuing discussion on such a topic when every day the tax base continues to be eroded.

    One of the biggest talking points will be the increase in the GST rate from 12.5% to 15% and there will be a number of opponents. These opponents will argue that lower income families will be unfairly punished. However the TWG have noted that and have suggested that the Government address the issue through other means of compensation such as an increase in benefits or other existing mechanisms currently in place. It is going to take a very brave Government to make this change and it is unlikely that the current Government will have the courage to make such a big change. To dismiss the idea outright may be to the detriment of New Zealand and its taxpayers. Is this recommendation going to be one of those that is left until the Government knows their time is up, makes the changes, commits to certain expenditure as a result and it is hard for a new Government to undo the changes? We certainly hope that this will not be the case. It would be poor leadership from a Government to do so. However we have seen such an action before and it would certainly make it a Government that would be remembered in the future. We at Budget Tax Returns would hope that the Government show true leadership and lead the way in debating the issue and doing more detailed analysis on the recommendation. It should not be left too long or New Zealand will continue to face the prospect of being left further behind Australia.

    The Minister of Revenue, Hon Peter Dunne, thanked the TWG and said that the Government will consider the report but has not given any commitment as to when they might give their opinion on the report. No real surprise there especially when you consider that a number of the recommendations could be viewed as controversial and what Government would want to take the risk that they are voted out at the next election. Whilst thanking the TWG the Minister expressed concern about the manipulation of family income to obtain Working for Families tax credits. He said "There is growing evidence that trusts and companies, and highly geared residential rental properties, are being used to reduce taxable income and so qualify for Working for Families. "Such abuse potentially places an unfair burden on the 60 per cent of families who do not receive Working for Families tax credits." Interesting that this is being said now when quite clearly for a considerable period of time now chartered accountants have been assisting their clients to obtain the Working for Families tax credits by using the tax system to its fullest and ensuring that income is manipulated for individuals whilst still ensuring the lowest amount of tax is paid. After all isn't that one of the expectations that people have when using a chartered accountant. If the Minister is so concerned why doesn't he take the initiative and actually do something about it? Does he actually want to do something about it or was it a comment so that he can feature in the headlines? Lets hope that was not the case but that instead he wants to take action and stop the manipulation that is occurring.

    With the TWG releasing its final report we are going to be monitoring the performance of the Government with regards to the recommendations and intend to lobby the politicians for changes to be made especially the depreciation claim on buildings. We need to face the reality that the tax system is broken and to repair it we need a strong Government making big decisions and now is the time. Do we have such a Government at present? How much longer can New Zealand under perform as a result of its tax system?

     

    Finance Minister Looking At Property

    4th November 2009

    The Finance Minister, Bill English, has given his strongest signal yet that property investment and the tax advantages are on his radar. For a long time now people have been investing in rental properties to get a tax advantage and this has also fuelled the housing boom that we have seen. In an interview on TVNZ last night Mr English said "We will seriously consider changes in the taxation of property. We haven't had those put to us yet but I think the evidence that investment patterns in New Zealand could be more productive I think is pretty strong."

    If the Government do make a decision to change the tax status of investment property there will be serious ramifications for the taxpayers concerned and also the economy itself. If the tax advantages are removed many investors will not be in a position to continue owning the investments and so have to enter the market to sell the properties. This could caused a collapse in the property market as inevitably there will be an oversupply of property. On the other side it would be good news for those looking to purchase their first home. With the pressure on the housing market from property investors many first time homeowners have struggled to find properties suitable for their needs.

    It is time that property investment and the taxation treatment is reviewed. It has been sometime since the Government looked at this area and the reality is that there is millions of dollars of tax which the Government misses out on because of the tax treatment. All too often we find people investing in property purely for the tax refunds that they can receive and have not considered any of the other factors such as return on investment, personal risk from the borrowings etc. We believe that many taxpayers would not normally invest in property if the tax advantages were removed. If the Government does make changes they need to think very carefully about the changes that may be made. They have indicated that the Loss Attributing Qualifying Companies (LAQC) are a target and rightly so because there are not many investors out there who don't use this form of ownership. However there are also non-property owning companies with the same classification which are registered as a LAQC for legitimate reasons. We do not want to see these legitimate companies attacked because of the rental property investors.

    We at Budget Tax Returns will be monitoring this situation very closely and will be ready to react to any changes that they may make. If you are a property investor you need to be very concerned and should be talking to your accountant in preparation for any changes that may come through.

     

    Christchurch Man Jailed For GST Fraud

    5th October 2009

    A Christchurch property developer has been jailed for two and a half years for GST fraud of more than $660,000. Philip John Duncan pleaded guilty to a total of eight tax evasion charges. Inland Revenue says that the sentence should serve as a warning for others trying to get an advantage from the New Zealand tax system. Inland Revenue have means of identifying these sort of people and they will get caught. The GST fraud involved a total of 5 companies with GST being claimed on a number of deals that never eventuated. Mr Duncan has been declared bankrupt and the money is not recoverable.

     

    Parliament Says IRD Not Doing Enough Regarding Tax Debt

    30th September 2009

    Parliament's Finance & Expenditure Committee has reported back regarding the Auditor-General's report on "Inland Revenue Department: Managing tax debt" published June 2009. Inland Revenue is facing tax debt spiralling out of control and in 2008 it reached $1.92b. For a country of 4 million people this level of debt is outrageous and more should be done to collect it. Some of the key recommendations are:

  • Collect and analyse information on cases managed by debt officers which is being limited by old technology;
  • Review what cases get allocated to debt officers;
  • Report number of debt cases, ago of the debt and what steps IRD are taking;
  • Improve information monitoring effectiveness and efficiency of tax collection work; and
  • Make the internal and external reporting align more closely.


    • It is pleasing to see that Parliament have agreed regarding the way that the tax debt is managed. For too long some taxpayers have manipulated the system and not paid their debts. We have seen it and hopefully with the above recommendations being implemented there will be some progress on the level of debt. Forecasts have this debt reaching $8b in the future. If we are to have a robust and sound tax system outstanding debts need to collected and all steps taken to collect that debt.

    For taxpayers there are a number of options that can stop them getting into debt or can help them when they are in debt. Both Inland Revenue and Chartered Accountants need to be looking at a more proactive rather than reactive approach if a taxpayer is having difficulty meeting their tax obligations. We have found Inland Revenue to be very helpful when approached.

     

    Should New Zealand Have A Capital Gains Tax?

    18th September 2009

    Periodically the topic of capital gains tax for New Zealand arises. The academics argue that the way our tax system is designed the rich are benefiting from not having a capital gains tax as they invest in those assets which generate a capital gain. We question the worth of a capital gains tax. New Zealanders are renowned for buying their own homes and most property in New Zealand is owned by the occupier of that property. These properties would be exempt from capital gains tax if we look at other countries. All a capital gains tax will do is complicate our tax system and potentially not generate the tax that many claim it would.

     

    IRD Monitors Trade Me

    8th June 2009

    Are you selling on Trade Me?   Inland Revenue could unwittingly class you as operating a business. Inland Revenue are monitoring the activities of selllers on Trade Me. Potentially there is a considerable amount of tax free income being earned and we believe Inland Revenue are justified in doing so. Why should some taxpayers pay their fair share of taxes and others don't? If you are selling on Trade Me and could be viewed as a business you need to make yourself very aware of the tax consequences.

     

    Tax Refund Booths In Malls

    18th April 2009

    In every major mall now you will see a booth offering to get you a tax refund. We believe that people should be extremely wary of these refund booths. If you do use a booth you must ask what their fee is, what they will do if they get your tax return wrong and what experience they have in preparing income tax returns. We know some booths are using very unskilled staff in terms of income tax. Use a refund booth at your own risk.