Tourism back-taxes

August 20th, 2008 at 8:20 am by David Farrar

NBR has a disturbing story:

Inbound Tour Operators Council of New Zealand president Brian Henderson said that the had reneged on a formal written agreement signed in 2001, about the GST tax treatment of the fees that operators charged to overseas wholesalers for arranging tours.

The industry followed initial advice that the fees should be zero-rated, but the IRD had since changed its mind.

IRD officials said last week that they would seek back taxes initially around $50m, but they reduced that to two years’ worth or around $30m, Mr Henderson said.

Paying back taxes would put some members out of business.

This is the reality for many small businesses. They simply won’t have the money to pay taxes they have not budgeted for.

I have no issue that the IRD can change its mind about how the tax laws work. But it would seem much fairer to only apply their new thinking from the date they publish it to all affected taxpayers, and not to apply it retrospectively when it contradicts their previous advice. A hallmark of the law is meant to be certainity.

One News covered this last night, as did Three News.

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18 Responses to “Tourism back-taxes”

  1. goodgod (1,348 comments) says:

    It’s our job to be fair… oh dear.

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  2. wreck1080 (3,958 comments) says:

    A shocker. Obviously MP’s want a pay rise and are pushing IRD to find funds to finance this.

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  3. pushmepullu (686 comments) says:

    I have no issue that the IRD can change its mind about how the tax laws work.

    Maybe you don’t, DPF, but I sure as hell do and I doubt I’m the only one. A law is a law is a law, how hard can it be for those brain surgeons in IRD to understand this? If they find the tax laws so complicated maybe it’s time to think about simplifying them with a fair tax?

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  4. Dave Mann (1,250 comments) says:

    Actually, this seems like a great new business practice.

    I think I’ll now contact all my clients over the past 5 years and retrospectively increase all my prices by, say, um… 15%. This will apply retrospectively of course so they will just owe me the money regardless of the current state of their account with me.

    When contacted regarding this novel operating procedure, I will tell them that I have simply changed my mind regarding all previous agreements and quotations I have made in the past and I’m sure that, once I have the power to dip into all their bank accounts and take the money from them without their specific authorisation, my business will thrive as a result of this strikingly original initiative.

    I find those old outdated principles of contract law and property rights etc so tiresome and I am looking forward to a new era where business can operate unfettered by the necessity to abide by agreements and fuddy duddy old understandings.

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  5. Glutaemus Maximus (2,207 comments) says:

    Simply dreadful, scurrilous, abusive, and above all should be challenged in Court.

    Pity the Privy Council got binned.

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  6. getstaffed (9,186 comments) says:

    “Te Tari Taake” – I think of this translating as “Don’t tarry! Take it!”…

    I’m guessing that Comrade Mikhail will be torn over this. It makes perfect sense to gouge as much tax as possible from rich-prick business owners, but the state windfall won’t be available for distribution before the election. Hmmm or will it? Perhaps this is part of the lead-up to fund the rumoured wiping of student debt – a $30m dent in a $10b+ promise.

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  7. dave strings (608 comments) says:

    bANKRUPCY IS, OF COURSE, THE BUSINESS OBJECTIVE OF THE laBOUR pARTY

    then they can step in, pay a pittance (or fortune depending on the influence of the current owner) for a business, and insist it isn’t nationalisation!

    One certain thing is that the drafting of law since 1999 has been shoddy, to say the least, and despite the best efforts of the committee clerks, there are grammatical loopholes that will keep lawyers in fees for many years to come.

    Nils illigitimi carborundum!

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  8. petal (706 comments) says:

    There should be legislation in place that prevents any sort of back tax to be announced unless it has prior parliamentary approval. It is simply unacceptable to have non-elected officials make arbitrary decision that can take out people’s livelihoods.

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  9. s.russell (1,646 comments) says:

    Tourism Minister Damien O’Connor claimed at a tourism conference yesterday that the outstanding amount was between $1.5m and $3m – not $30m.

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  10. peterwn (3,304 comments) says:

    As the whole tax collection is legislation driven, equitable principles such as ‘estoppal’ (which is the relevant one here) do not come into the picture.

    The courts have ruled that it is the job of IRD to collect taxes according to the law, and has in particular that it is not “[IRD’s] job to be fair” as was their advertising slogan some years back.

    The underpinning for this would be Article 1 of the Bill of Rights 1689 “That the pretended Power of Suspending of Laws or the Execution of Laws by Regall Authority without Consent of Parlyament is illegall,” which is what Rob Muldoon was successfully accused of breaching in 1975 ofer his announcement to wind up the Kirk Government super scheme. If IRD did give a ruling and later found it to be wrong then under this Article 1 then IRD has no option to collect the taxes in question retrospectively.

    IMO there should be more flexibility, but apart from the ‘binding rulings’ system, Parliament has not agreed to such flexibility.

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  11. JohnMacc (60 comments) says:

    The industry reps’ complaints on this smell a little fishy to me. Sounds like IRD previously issued a ruling or guidance on how certain fees would be treated and they’re tightening up on it now because they’ve found some operators are misusing it. Its natural to be sympathetic toward the little battler businesses over the evil grasping taxman – but perhaps that sympathy is being played on here.
    As I understand it, a fee charged overseas by a NZ tourism operator should only be zero-rated if the goods and services provided are provided overseas. I suspect some operators have been found to be loading charges for NZ-based tourism services into their wholesaler “fees” to avoid tax liability. If so, IRD is right to crack down on this.
    I agree that ideally, tax rulings should be clear and consistent, and changes shouldn’t be retrospective. But in practice, things are messier than that. As long as IRD are consistent and transparent about what they’re doing, I don’t have a problem with this. Lets see what else comes out about this in the next few weeks…

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  12. freethinker (694 comments) says:

    JohnMacc
    As Gst is charged in addition to the fee the operator is simply collecting the tax on behald fo IRD so zero rating doesn’t change the actual liability so how does this benefit the operator?

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  13. petal (706 comments) says:

    freethinker makes an excellent point

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  14. deanknight (263 comments) says:

    The courts have made it clear that, in some circumstances, the government may be prevented from reneging on assurances previously given to citizens (either under the estoppel principle, or its public law equivalent, substantive legitimate expectation).

    In the leading House of Lords case, R. v. Inland Revenue Commissioners, ex parte Preston [1985] 2 All E.R. 327 – a tax case itself – it was said:

    “In principle I see no reason why the appellant should not be entitled to judicial review of a decision taken by the commissioners if that decision is unfair to the appellant because the conduct of the commissioners is equivalent to a breach of contract or a breach of representation. Such a decision falls within the ambit of an abuse of power for which in the present case judicial review is the sole remedy and an appropriate remedy. There may be cases in which conduct which savours of breach of conduct or breach of representation does not constitute an abuse of power; there may be circumstances in which the court in its discretion might not grant relief by judicial review notwithstanding conduct which savours of breach of contract or breach of representation. In the present case, however, I consider that the appellant is entitled to relief by way of judicial review for “unfairness” amounting to abuse of power if the commissioners have been guilty of conduct equivalent to a breach of contract or breach of representations on their part.”

    If you can be bothered wading through 65,000 words on the topic, you’re welcome to read my thesis on this issue:

    > Knight, Estoppel (principles?) in public law: the substantive protection of legitimate expectations

    Of course, it’s interesting to see this argument about estoppel gets some traction amongst the right. This, of course, was the very principle that was poo-pooed by folk when it was mentioned in the context of the pledge card spending issue. See:

    > LAWS179: “Shifting goalposts”

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  15. aardvark (417 comments) says:

    As someone who’s been at the mercy of the IRD I can fully emphathize with those affected.

    As many will know, the IRD bankrupted me for alleged monies owed after I came into the world spotlight as the guy who built his own cruise missile.

    But here’s something that will make you stop and think…

    I was bankrupted for an alleged debt of tens of thousands of dollars.

    Since then I’ve not paid a bean of tax because I haven’t been in paid employment (I’m supported by my wife).

    However, last month, out of the blue, I got a cheque in the mail from the IRD for the princely sum of $27 with the notation “Refund resulting from departmental action”.

    So one minute (after I’ve paid over $100K in tax in a single year) they say I still owe them tens of thousands more and bankrupt me for not paying it “on demand” — then I get a refund?

    Now tell me something doesn’t smell *REALLY bad here!

    And wait until you read the rest of the underhanded tactics I was dealt. It’s all in my book (blatant plug: http://www.interestingprojects.com/cruisemissile/missilemanbook.shtml

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  16. JohnMacc (60 comments) says:

    Freethinker. Simple really. The overseas wholesaler not going to be claiming back the gst – so they face the full tax-included price. At any given price, those NZ operators who don’t add gst will earn 11% more. So zero rating doesn’t change your liability – it changes your profit.

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  17. OECD rank 22 kiwi (2,753 comments) says:

    The IRD up to its old tricks as usual.

    You work hard, bear the risks of your venture, finally make a modest profit in a tiny market and then the IRD pull this s***. There’s tall poppy syndrome and then there’s pure economic sabotage.

    What’s the point of doing business in New Zealand again?

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  18. OECD rank 22 kiwi (2,753 comments) says:

    “What’s the point of doing business in New Zealand again?”

    Oh that’s right, invest in the “profitable” investment property market and legally scam the tax system. Another unintended consequence of the 39c tax rate introduced by Labour, yet National remains silent on scrapping the 39c tax rate.

    Bernard Hickey comments on that issue over at Interest.co.nz:
    Opinion: Remove the tax incentives for housing investors

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