Drury says NZ needs a CTO

July 2nd, 2014 at 2:00 pm by David Farrar

Stuff reports:

Barack Obama has one. So do many large companies. The chief technology officer’s role, for the US at least, is to apply technology to help create jobs, reduce the cost of health care, help keep the nation secure and increase access to broadband.

New Zealand is the farthest country from its trading partners in the world. As a small, sub-scale, island nation we have the most of any country to gain by technology.

Our Government has done a great job with fiscal management and has achieved some useful incremental tweaks, but we haven’t as a country played a bold move with technology. We lack a technology plan.

In the last term, we went through the traumatic restructure of our telecommunications industry, and during the past three years the focus has been the implementation of the domestic ultrafast broadband network – a key part of improving the internet.

Over this timeframe, technology has seen entire industries disrupted, and new organisations like Xero, Vend and others become world-leading cloud companies, all from our small set of rocks in the South Pacific.

But as a country, we’ve been far too passive about using technology to redefine our place in the world. …

I believe the answer is to appoint a chief technology officer of New Zealand. Similar to the chief science officer, Peter Gluckman, but in the technology arena. A respected senior, international, technology leader at a point in their career where they want to give back.

That person can identify and determine the big issues of the day, own a New Zealand technology strategy and be the interface between the private sector and the Government.

They would be able to co-ordinate and encourage the investments that global technology companies will make in New Zealand.

Like Gluckman, a chief technology officer would have the ear of the Prime Minister and report regularly to the Cabinet. They would provide the interface point for industry to connect to the Government and provide the opportunity for a bold vision to be determined and implemented. 

Not a bad idea I must say.

Rod also has a radical idea for the IRD:

Inland Revenue has responded guardedly to a call from Xero founder Rod Drury for it to use a “public-private partnership” to replace its computer systems.

Spokeswoman Lorna Milton said considerations included taxpayers’ privacy and the “integrity of the tax system”.

The department warned in 2012 that it might cost up to $1.5 billion to replace its ageing mainframe-based First computer system.

Drury said Inland Revenue could save “hundreds of millions” if it just published the tax rules, maintained a computer that could collect tax payments, and left the rest to private-sector businesses such as Xero.

That would not mean everyone would need to pay to use Xero’s cloud-based service, or those of its rivals, he said.

Instead, Xero and other software companies could offer a free service that would let taxpayers key in any information needed for tax returns into online forms and would process that for no charge as part of a broader, non-exclusive partnership, he said.

“The private sector could do the ‘heavy lifting’. Inland Revenue doesn’t really need to build all the complex rules any more; all they need to do is be a transaction system that receives money and publishes the rules and the private sector is more than happy to invest in building the online returns.”

IRD has some issues with the idea:

Milton said Inland Revenue saw opportunities to integrate Inland Revenue’s systems with third-party software applications “to allow tax agents and software providers to carry out some services that Inland Revenue currently provides”.

But she said there were several factors to consider, “particularly taxpayers’ privacy and security, the accuracy of information, maintaining the integrity of the tax system and how our core systems interact with third parties”.

I hope it is given serious consideration.

 

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Wheeler named public sector chief executive of the year

June 3rd, 2014 at 12:00 pm by David Farrar

Hamish Rutherford at Stuff reports:

A former top international banker, who stared down the Beehive with lending restrictions and official cash rates rises months from the election, is this year’s public sector chief executive of the year.

Graeme Wheeler, who became Reserve Bank governor in late 2012, was today named as the top public sector boss in political newsletter Trans Tasman’s fifth Annual Briefing Report.

Since replacing Alan Bollard, Wheeler has introduced controversial loan to value ratio limits on mortgages in an attempt to cool the housing market and raised the OCR  twice this year.

Both moves were politically unpopular, but Trans Tasman said the ‘‘fresh ideas’’ made him chief executive of the year and the Reserve Bank’s best governor since Don Brash – a dig at Bollard, whose decade in charge was bookended by Brash and Wheeler.

‘‘He’s made some gutsy calls and stood up to the political pressure not to interfere in the iconic quarter acre dream,’’ the report said of Wheeler.

‘‘A courageous governor – and we will find out over the next year or so whether he made the right calls.’’

The awards were chosen by a 16-strong independent board of advisers.

Inland Revenue was named department of the year because of a ‘‘clear improvement in customer engagement’’ over the past 12 months.

‘‘One of the only departments leading the charge online for better customer and business interactions,’’ Trans Tasman said.

‘‘It is no longer just a compliance agency. It is also being seen by the public as a crusader which goes after people who try to avoid their tax obligations.’’

As with previous years, I’m one of the 16 advisors. The release from Trans-Tasman is here.

As an employer, I have to say dealing with the IRD is so much easier than years ago. No more waiting on hold – just send secure mail. Can check my account balances instantly, and lots of useful calculators.

The Reserve Bank Governor should be fiercely independent. It is a tribute to Wheeler that he listened politely to the Government wanting to exempt first home buyers from the LVRs, but then decided it wouldn’t work with that exemption and proceeded. It is unfortunate that Labour has vowed to over-turn that independent decision should they win Government.

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Herald hypocrisy

January 13th, 2014 at 3:00 pm by David Farrar

The Herald editorial:

Many firms that practice tax avoidance probably do feel wretched about it. But they owe it to their shareholders to pay no more tax than their lawyers and accountants say they must, and they transfer the blame to the legislators who leave loopholes for them, or who set taxes too high or spend the revenue unwisely. With the company tax rate at 28 per cent in New Zealand, lower than the top personal income rate, it is hard to justify corporate avoidance here.

A NZX filing by APN which owns the Herald in 2013:

APN News & Media [ASX, NZX: APN] today announced an update in relation to a tax dispute following a report received today from the Adjudication Unit of the New Zealand Inland Revenue Department (‘IRD’).

As stated in the Company’s 2011 Annual Report and the 2012 Preliminary Final Report lodged yesterday, the Company is involved in a dispute with the IRD regarding certain financing transactions.

The Company is satisfied that its treatment of the financing transactions is consistent with all relevant legislation and that no tax will become payable.

The dispute involves tax of NZ$48 million for the period up to 31 December 2012. The IRD is seeking to impose penalties of 50% of the tax in dispute and interest in addition to the tax claimed. In the event the Company is unsuccessful in the dispute the Company has tax losses available to offset any amount of tax payable to the extent of NZ$32 million.

These wouldn’t be financing transactions that resulted in a lower tax bill and hence was tax avoidance?

So does the Herald feel wretched about its own tax avoidance?

Will they apply their own moral standards to themselves and pay up the $48 million they owe the taxpayers of New Zealand, according to the IRD?

I look forward to both RNZ Mediawatch and the Herald own’s media column highlighting this flagrant case of total hypocrisy.

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Tax and welfare debt

August 14th, 2013 at 2:00 pm by David Farrar

Laura Walters at Stuff reports:

Government agencies are more likely to write off unpaid tax than welfare debt, new research shows.

Victoria University accounting and commercial law associate professor Lisa Marriott’s research showed Inland Revenue was more likely to write off unpaid tax than the Ministry of Social Development (MSD) was to write off welfare debts.

So why might this be?

“There appears to be no basis for treating debtors to the two government agencies differently,” Marriott said.

I agree, but are they treated differently when different factors are accounted for?

Between July 1, 2011, and June 2012, Inland Revenue wrote off nearly 50 per cent of interest and penalties applied to overdue tax, amounting to $374 million.

It wrote off $435m in core debt, reflecting 11.6 per cent of collectable debt, the study showed.

MSD wrote off $8.7m in core debt, or 2.1 per cent of collectable debt.

The study showed that in the same period, the average value of outstanding tax debt was $14,479 per taxpayer in debt, while the average value of outstanding welfare debt was $2523 per beneficiary in debt.

And that is the key difference – the level of debt. The more debt that is owed, the less likely it is the person owing it can pay it. Those with high levels of debt can choose bankruptcy which means almost no debt gets paid. Hence you sometimes work out a compromise.

The research is interesting, but not conclusive. What would be more useful if an analysis of how much is written off by IRD and MSD for debts of a similar level. I doubt IRD writes off many debts when say just $1,000 is owed.

MSD would collect debts from beneficiaries’ payments, she said.

That may explain some of the difference also. IRD can’t just simply deduct tax owed from money it pays you. At best it can go to your bank or employer and ask them to do it.

 

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The value of data-matching

July 18th, 2013 at 3:00 pm by David Farrar

Stuff reports:

More than 3000 alleged welfare cheats receiving a total of $33.7 million a year have been caught in the past six months.

The Government says the findings are the result of a new way of sharing information between Inland Revenue and the Ministry of Social Development which started this while it is also looking at tying the amount of money they have to pay back to their wages in a bid to recoup costs faster.

Associate social development minister Chester Borrows said a total of 3139 people were caught in the investigation, with 1948 on an unemployment benefit and 559 on a sickness benefit.

He said the ministry believed it would be able to prove a ”big chunk of them” were intentionally defrauding the taxpayer though some could have been a legitimate oversight, he said.

”The fact is that these 3139 have been found to be paying more tax than they should have been if they were only earning their $100 a week maximum that they were allowed to on a benefit so there is obviously a reason for suspicion there,” he said.

That’s a great practical example of the value of being able to have IRD and WINZ check data with each other.

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Drury on IRD computer system

May 3rd, 2013 at 9:00 am by David Farrar

Rod Drury writes at NBR:

The New Zealand Government has recently agreed to spend $1.5 billion to redo the New Zealand tax system.

To anyone in IT this is an obscene amount of money to spend on an software project.

From the outside it seems like a slow moving train crash reminiscent of earlier Big Bang projects that always blow out if they are ever delivered.

It reeks of global consulting firms winning the business and then rapidly hiring a bunch of grads and putting them up in hotels for years.

It’s just not smart.

I’m unconvinced that any computer system should cost that much. I’m hoping that the $1.5b price tag is a worst case budget provision so they can come up well below budget.

We’re a market of 4 million  people and 400,000 businesses, so it’s just not that big. Many SaaS [software as a service] companies are already a good portion of those transaction levels at a fraction of the cost by using commodity, high performance, technologies.

Xero has spent around only $80 million getting to where it is today. Even if IRD was 10x Xero (it’s not) why isn’t $800 million a reasonable number?

And costs are not proportional.

But rather than just criticise here’s some practical suggestions I’d offer to to see if we can save $500 million to $1 billion in spend.

1. Start from the customer and work in, replacing the edges. Identify the key external interactions and publish those as web services.  Get the messages into a commodity systems and then connect these systems to the core FIRST servers. That will take load off, allow quick wins and lots of options.  As the core engine is surrounded it can be gradually replaced. A GST Return WebService would be an ideal place to start.

2. Don’t build the retail tax front end. Just publish the rules and invest in just the very core system. Let the private sector invest in the layer customers interact with. Certify providers that they met the requirements.  Payroll software pretty much works like that now. That offloads the investment to the private sector who are happy to build.

3. Go out to the NZ service companies and get them to stand up a consortium and carve up the opportunity themselves and put in place the appropriate governance structure. Give them the challenge to save $500 million on a fixed-fee basis and transfer project risk to the private consortium.

4. Appoint an independent board of systems experts to review the project and provide ongoing governance over it.

I’d start with recommendation 4 and appoint Rod to chair it!

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IRD wins again

March 6th, 2013 at 11:00 am by David Farrar

Hamish Fletcher at NZ Herald reports:

International investors could be scared off by a Court of Appeal decision yesterday which saw Inland Revenue notch up another big win, say tax specialists.

Alesco New Zealand lost another leg of its stoush with the IRD yesterday over whether a funding structure used to buy two other companies was a tax avoidance arrangement.

The amount at issue in the Alesco case is $8.6 million, but yesterday’s judgment could have implications for other tax avoidance disputes with the IRD where hundreds of millions of dollars are estimated to be at stake.

Decisions in these cases were awaiting the outcome of the Alesco litigation, the Court of Appeal said.

University of Auckland Business School senior tax law lecturer Mark Keating called yesterday’s decision a “slam-dunk” for the IRD.

“If there’s an imaginary line that you cross between tax planning and tax avoidance, then IRD have been taking cases that go closer and closer to that line,” Keating said.

“The [corporate] taxpaying community are basically waiting for a case where the IRD overstretch and there were a number of people who hoped and believed that Alesco would be that case.”

Ernst & Young senior tax partner Jo Doolan said yesterday’s judgment was an “alarming result”.

“It reinforces the feeling of many inbound investing corporates that the NZ tax environment is too uncertain. It may discourage them from continuing to do business here,” she said.

I’m sorry, but I just don’t accept the argument that companies will not invest here if they are not allowed to avoid paying tax.

I’m all in favour of lower tax rates to encourage investment. But I’m also in favour of plugging tax loopholes.

I think it is commendable that IRD has been very effective in making sure companies don’t avoid paying tax purely through use of artificial mechanisms that have no commercial basis except tax avoidance. They managed to get the banks to cough up an extra billion dollars or so, and I understand APN (owners of the Herald) are also in court and fighting over $50 million or so of disputed tax.

The best tax system is low rates, broad base and few loopholes.

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IRD confirms the obvious

December 20th, 2012 at 11:00 am by David Farrar

Hamish Rutherford at Stuff reports:

New Zealand has no power to ensure internet giants like Facebook and Google pay more tax, according to an IRD report.

The new report appears to back Revenue Minister Peter Dunne’s claim that New Zealand cannot solve corporate tax loopholes alone, arguing that even law changes would be overridden by international treaties.

Of course it does. NZ simply has no power to tax overseas corporates. If I buy a book from Amazon, can the Govt force Amazon to pay tax in NZ? Of course not.

The issue of tax rates on international companies, especially in the technology sector, has hit headlines since it emerged Facebook paid less than $14,500 in New Zealand last year, or less than 1 cent for every one of its 2.2 million Kiwi users.

That’s a silly comparison. You don’t tax firms on their number of users. You tax them on their profits. It is even sillier when you consider Facebook does not charge a user fee.

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IRD phone calls

July 13th, 2012 at 10:00 am by David Farrar

Stacey Kirk at Stuff reports:

Government cuts and poor planning have left more than 70,000 calls to IRD unanswered over its busiest tax return time, the Public Service Association (PSA) says.

IRD figures showed about 70,000 calls weren’t answered between June 25 and July 5 – the two weeks leading up to the deadline for filing tax returns.

During that period 164,000 calls were planned for, but more than 202,000 were received. Of those only about 131,000 were actually answered as the department struggled to cope with increased demand.

The PSA said there had also been a significant increase in the number complaints about the phone service.

National secretary Richard Wagstaff said it was frustrating for both the public and staff but was a “clear consequence” of budget cuts and bad decision-making.

I’m a bit surprised by those numbers as I was one of those callers towards the end of that period. I first registered on their new voice authentication system. You repeat three phrases three times and their system records your voice patterns. This means that for future phone calls, they have a higher confidence they have verified your identity, and can deal with more stuff over the phone.

After the authentication there was a delay until answering, but only one minute. The good thing is the IRD system now tells you how long the delay is which makes a huge difference.

Then once I got through to a staffer, she talked me through how to get a personal tax summary, and I managed to file my effective return online. It went very smoothly.

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Robin Oliver

May 25th, 2011 at 12:00 pm by David Farrar

Patrick Smellie at Stuff reports:

For one of the most fearsome tax minds in the country, departing deputy Inland Revenue Department commissioner Robin Oliver is more imp than ogre.

Robin has been head of policy for IRD for many years, and is hugely respected.

His views on what makes tax policy work are carbon copy Roger Douglas, but he can just as easily whip up a good line in class warfare when describing the kind of social balance a tax system must achieve to succeed.

Grinning, he illustrates a point by asking whether it would be “acceptable for me to retire with international investments, sit on a beach paying almost no tax and using the health system, while some family in South Auckland pays enormous taxes, working double shifts cleaning offices”.

And receiving non means tested NZ super!

His proudest moment was when a meeting of New Zealand businesspeople and accountants rejected the previous government’s research and development tax credits as bad policy.

“All the big four [accounting firms] had to pay off staff and close parts of their businesses, but they never lobbied to keep [the tax credits] because it wasn’t right in their view.”

Yes, I suspect schemes such as R&D tax credits create huge amounts of work for accountancy firms, as companies reclassify expenditure to qualify for the tax credits, It probably creates a mini-industry around how to gain the tax credits.

Mr Oliver says the big tax issues don’t change much over time – the rate, concessions versus broad base, tax everyone or only some people – and there are still only three places to turn for tax: labour income, capital income and land.

Yet he defends the lack of New Zealand capital gains and land taxes.

“It’s not purist, just a practicality,” he says, noting that IRD changed from advocating capital gains to believing it couldn’t be done efficiently.

“No one taxes the family home and, in New Zealand, what do you do about farming? The common farming career progression is to trade to larger farms. A capital gains tax would kill that. What would you do about communally owned Maori land? Capital taxes are levied at death. You can’t tax Maori land that way.”

The alternative is a capital gains tax as complex as Australia’s, where “they have whole conferences on what should be in and what should be out”.

Labur are thought to be considering proposing a capital gains tax. If they do, and win the election, I predict great times for the tax industry as lawyers and accountants prosper.

I do believe a land tax has some merit, so long as it is not about increasing the overall level of taxation.

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IRD Service

December 15th, 2010 at 3:29 pm by David Farrar

I needed to get a copy of some old tax summaries from the IRD. I was dreading spending half my day doing so, but had a very pleasant surprise.

My first call had the robot tell me that I could hold on, or have someone call me back (at my place in the queue). This would have been a great thing to do if the wait was ages. As it happened, they said the wait was only 2 -4 minutes, so I held on and I got to a human within three minutes.

The staffer understood what I needed and told me I could either request them by post (which takes ages) or get myself a login and retirieve them myself. I already had a business login, but not a persomal one. I decided to give the personal login a go, but was nervous that it would again takes ages.

Went to the website, filled in the forms in around 90 seconds. Then phoned the validation phone number and they asked me some questions. In well under five minutes my account is operative.

I login to IRD, and locate the tax summaries I need, save them as pdfs and e-mail them to my bank. Total time is less than 10 minutes.

I am seriously impressed with that sort of service. Well done IRD.

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CTU asks UNITE to explain unpaid PAYE tax

December 3rd, 2010 at 11:00 am by David Farrar

In a follow up to the story I blogged about yesterday, Rebecca Stevenson at the Dom Post reports:

The Council of Trade Unions wants an explanation from Unite on why it failed to pay the IRD more than $36,000 in PAYE on behalf of its employees.

Unite, one of New Zealand’s largest unions, owed IRD over $130,000 for the year ended March 2009 (its most recent filing), including more than $57,000 in unpaid GST. For the same financial year its liabilities outweighed its assets by more than $170,000.

It is the unpaid PAYE that will be causing most concern, as this is in fact money owed by the employees to the IRD, and UNITE has appropriated it for its own purposes. It is the sort of stuff that the newspaper boss Maxwell did – but on a much smaller scale.

Unite head Matt McCarten confirmed yesterday that the union owed money to the IRD but said he had made choices to pay for union campaigns rather than clear the debt. “I don’t shy away from these decisions, I make the calls.”

He said Unite paid $8000 in PAYE each month to the IRD but kept incurring late payment penalties. He claimed not to know exactly how much it owed the IRD.

The late penalties do add up – as many businesses know. But if it was a deliberate decision to keep running campaigns, instead of paying off the debt, then few will have sympathy.

He agreed it was not a good look for a workers’ union to fail to pay its employees’ tax.

I don’t think Matt realises how bad a look it is. The next time UNITE or Matt calls for greater government spending, this issue will arise.

CTU president Helen Kelly said Unite did good work in an area that was difficult and expensive to organise. That required it to juggle its finances. “All unions are always short of resources.”

However, when questioned on Unite’s tax failure, she said: “I need an explanation for that”.

I’m not sure I would say all unions are short of resources. The combined wealth of the union movement puts the Business Roundtable, Business NZ, and the Chambers of Commerce to shame. I did a blog post a couple of years back comparing them.

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Is UNITE solvent?

December 2nd, 2010 at 3:41 pm by David Farrar

Daniel on Twitter pointed me to the audited accounts for the UNITE union, which are filed with the Registrar of Incorporated Societies.

The accounts to 31 March 2009 reveal the following:

  • Their liabilities exceed their assets by around $172,000
  • Their bank account is over-drawn to $63,000
  • They owe the IRD around $130,000
  • They have an agreement with IRD to pay the debt off at $8,000 per month
  • They have a $30,000 loan from the National Distribution Trust, which presumably is associated with the ND Union.

This is a very bad look for a trade union, as some of their unpaid tax is PAYE. That means that have been taking the tax off their staff, and rather than pay it to the IRD, have kept onto it.

Employers who do that are labelled thieves and bad employers. It is seen as worse as not paying income tax because it is not tax on your own income, it is tax on behalf of your employees and you are acting in a role as trustee to deduct and pass on.

The 2010 accounts have not been filed. Hopefully they have paid back the IRD.

I like Matt McCarten – he is a genuine advocate for his beliefs. But to advocate that the state should be spending far more money, and have your own union not paying their taxes, exposes you to charges of hypocrisy.

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Gift Duty abolished

November 2nd, 2010 at 1:00 pm by David Farrar

Brian Fallow in the Herald reports:

The Government is to abolish gift duty, confident any risks to creditor protection or the targeting of social assistance programmes can be met by other laws.

The 125-year-old tax has brought in an average of $2.2 million a year over the past seven years, and on a declining trend.

But officials estimate it imposes $70 million a year in compliance costs on taxpayers, or rather on non-taxpayers, as only about 900 or 0.4 per cent of the 225,000 gift duty statements filed to the Inland Revenue a year disclose a liability to pay the tax.

A sensible move by Peter Dunne. Peter has been a revenue Minister in three separate governments, and has actually a achieved a lot of useful reform.

The good news with the law change is that Kiwblog readers can now donate more than $27,000 per annum to me, without attracting gift duty :-)

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Let the IRD collect your pay for you!

September 8th, 2010 at 9:05 am by David Farrar

The Telegraph reports:

The tax authorities are consulting accountants, lawyers and businesses on the plans to reform the pay-as-you-earn (PAYE) system. …

To make PAYE more accurate, Treasury ministers have suggested that employers should provide HMRC with monthly updates on workers’ salary payments and other financial details.Such “real time information” could then be used as the basis of a new “centralised deductions” system that would give HMRC an unprecedented role in workers’ monthly salary payments.

Under the centralised deductions system, employers would pay workers’ monthly salary into a central calculator run by HMRC.

There, income tax deductions would be made automatically and the net salary then passed on to the worker by HMRC.

Body … dead … over.

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IRD moves online

June 10th, 2010 at 10:00 am by David Farrar

The Herald reports:

Taxpayers’ business with the Inland Revenue Department will be mainly done online within two years.

The switch from letters will deliver “substantial” savings but may also cost jobs and raise privacy issues.

Revenue Minister Peter Dunne yesterday said the Government was seeking public feedback on proposed “major” changes “to simplify the tax system and make it easier for people to manage their tax affairs”.

Proposals include allowing people to “self-manage” most of their tax and social assistance entitlements such as Working for Families using a secure area on the IRD’s website in a process akin to internet banking.

This will be useful and popular. Those with student loan balances should be able to go in and see how much is still owing, make a deposit etc. Also from what I understand you will be able to see at any time how much tax you have paid that year through PAYE, and how much you should have paid overall.

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Payroll Giving

January 6th, 2010 at 12:00 pm by David Farrar

One of the minor law changes made last year, is to enable payroll giving. This allows you to make a donation to charity through your employer (if they choose to participate) and you automatically get the tax rebate.

In other words if you donate $6 a week to a charity through payroll giving, then your net pay only drops by $4 a week, as the $2 a week rebate is automatically claimed back for you.

This scheme goes operative on Thursday 7 January 2010, for those who file electronically with the IRD. I’m certainly going to offer it to my employees, as it involves miniscule admin work for employers – it is all done automatically.

Also an an employee, I’d find it great. I always find it a hassle keeping all my donation receipts and then having to file for a rebate/refund from IRD. To have it happen automatically will be a real time saver.

There is a short IRD guidebook on it, plus an employee FAQ and employer FAQ.

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Tax Avoidance

October 26th, 2009 at 2:00 pm by David Farrar

The SST reports:

Finance minister Bill English has signalled the government will next year get tough with tax-dodgers by closing loopholes that allow wage earners to avoid paying their share of tax.

The IRD says the government is missing out on $300 million a year because of wage earners who squirrel away money into trust accounts to avoid paying the top income tax rate. More is lost because of earnings that are “sheltered” by a company created solely to avoid tax.

Not sure how you can legislate to fix that.

The IRD, in its latest submission to the Tax Working Group, says the problem is that New Zealand’s multitude of tax rates is encouraging bad behaviour.

Oh I am sure it is.

It said the trust account and company tax rates were too far out of line with income tax rates. Taxpayers were placing income in a trust account, paying 33 cents for every dollar earned, rather than the top rate of 38c. Another common ploy was for individual taxpayers to “shelter” their money by creating a company so that they paid 30 cents of every dollar earned in tax rather than the top rate.

The preferred solution is to lower the top tax rate – in fact that is the Govt’s official goal – to have a top tax rate of 30% for individuals, companies and trusts.

The IRD says that when the top income tax rate of 39 cents (now 38 cents) was applied to earnings of $60,000+ in 2000, a flood of taxpayers rearranged their finances to avoid the new regime.

I understand the number of people who declared they earned exactly $60,000 increased literally exponentially.

English said large-scale “legitimate avoidance behaviour” by higher-income earners undermined the goodwill of lower-income earners.

“It’s quite telling that there has been virtually no growth in the number of people paying tax on $1 million of annual income, since the 39 cent top personal tax rate was introduced 10 years ago.

So reduce the incentives for avoidance and cut the top tax rate. When Muldoon’s top tax rate of 66% was dropped to 33%, it killed off much of the avoidance industry. Cullen recreated it.

Also some of the reason for no growth in people paying tax on a million dollars of income, is they have gone overseas.

“As a country, we want families, businesses, accountants and lawyers looking at how to unlock greater income and productivity, not working out how to minimise their tax.

“We don’t want people spending their time and resources trying to avoid tax. We also don’t want IRD devoting all its time to chasing tax and compliance issues.”

Then again drop the top tax rate!

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Thanks Westpac

October 8th, 2009 at 3:55 pm by David Farrar

Stuff reports:

The Inland Revenue Department is welcoming a ruling from the High Court in Auckland ordering Westpac to pay $961 million in back taxes.

That must be a record!

I’d say Bill English and Peter Dunne are pretty happy today.

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Thank you very much for your kind donation

July 17th, 2009 at 8:04 am by David Farrar

That is the theme song Bill English and Peter Dunne are probably humming to themselves, after the IRD won a court case with the BNZ, resulting in a judgement for the Crown of $645 million, and a potential precedent for the total $2.4 billion in dispute.

The decision will of course be appealed all the way to the Supreme Court, so Bill and Peter shouldn’t rush to the mailbox to look for a cheque.

With credit rating agency Fitch placing NZ on negative outlook, the Government will want all the money it can get. The potential downgrade reinforces how vital it is to keep the pressure on low quality spending to prevent a downgrade that will cost consumers, businesses and taxpayers. This shows how reckless Labour’s contnual demands for more spending are.

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IRD vs the banks

June 15th, 2009 at 8:29 am by David Farrar

The Dom Post reports:

The Inland Revenue Department is asking the High Court to rewrite tax law in a $641 million tax avoidance case between it and the BNZ, the bank says. …

And:

BNZ is the first of the four main trading banks to challenge Inland Revenue’s claims of tax avoidance by using so-called structured financial transactions, involving foreign financial institutions between 1998 and 2002. The banks have been assessed to owe about $2 billion in unpaid taxes and interest. Inland Revenue claims the transactions generated tax losses through fees and hedging costs which the bank then used to offset other taxable income.

But BNZ’s lawyer Alan Galbraith, QC, said in his closing submissions to the High Court at Wellington that Inland Revenue’s case was “fundamentally misconceived” in the legal interpretation and tests, and the commercial and economic reality of the deals. Inland Revenue had also incorrectly inferred that, if Parliament had mistakenly failed to bar the use of structured financial transactions in tax legislation, the court could remedy the situation.

There is a lot at risk with these cases. I understand from informed sources close to one of the banks, that they have offered to settle the case for around $500 million. Informally it seems this was acceptable to Ministers, but that Crown Law was strongly against any settlement.

I understand that until the cases are resolved, there is considerable uncertainity over funding arrangements for the banks, and this is partly why interest rates are not dropping more.

I don’t know the strength of the Government’s case, but I imagine questions will be asked if they lose the case, after declining half a billion dollar settlement. And if the banks do lose, I suspect it will end up in the Supreme Court in a few years. And the problem is that until we get a final Supreme Court ruling, uncertainity may remain.

UPDATE: An informed source tells me that the Government is not facing much risk due to the Supreme Court decision in Trinity. They agree it will go to the Supreme Court but are very confident that the cost of doing so will be a small fraction of the eventual judgement.  Also that IRD generally can not agree to part settlements – only to reduce or waive penalties.

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Small world

April 22nd, 2009 at 3:00 pm by David Farrar

Had an amusing phone call with IRD yesterday.

Rang them up to activate my new IR File account (and kudos to IRD – I love what I can now access online) and the staffer did that for me. He then asked if there was anything else he could do, and I had a small refund owing to me from a few years ago (I lost the cheque they sent so it has been sitting there as a credit balance). So I asked if I could get the credit balance paid out.

As we were about to do that, I inquired whether it might be better to transfer the credit balance from my personal account to my company account. This would be beneficial in reducing net interest. As I am 100% owner of my company, this is meant to be possible.

The staffer then needed to look up my company in the Companies Register, to check this out and did so. Then he came back on the line having discovered it also owns and trades as Curia Market Research (my polling company). He informed me that he actually used to work for me as a pollster in the evenings.

Now that is a very small world – discovering the IRD staffer used to work for you. Unfortunately for me it also meant he could not complete my request as he was conflicted so I was transferred to another staffer (who was also very helpful).

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IRD here to help

March 19th, 2009 at 12:00 pm by David Farrar

Kudos to the IRD for their attitude:

If putting off paying tax is what a company needs to do to survive, then it should, the Commissioner of Inland Revenue says.

IRD is urging businesses to get in contact at the earliest opportunity if they are having trouble meeting their tax obligations.

Bob Russell said the department could ease the burden in a number of ways, such as agreeing to payments in instalments and waiving penalties.

Tax payments can be challenging for some businesses, especially that you often have to pay tax on income before you have always received it all.

However be aware you will still have to pay interest, and IRD interest will be more than what you can borrow comercially for.

IRD charged use-of-money interest – currently 9.73 per cent, having dropped from 14.24 per cent as part of the Government’s small-business relief package – and it was not opposed to companies considering that as a banking facility if they needed to for a time.

“In fact we might think that that’s a good strategy for them if they come and talk to us and get into an instalment arrangement,” Russell said.

“We’re prepared to wait a little while, the interest will accrue but the penalties can be turned off while they do the things they need to do to survive and get past their difficult time.”

Very reasonable.

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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 IRD 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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Winston’s response

July 25th, 2008 at 5:37 pm by David Farrar

NZPA reports on Winston’s response:

Television New Zealand News has shown Mr Peters saying he has no involvement with the Spencer Trust, into which Sir Robert Jones paid $25,000 when he believed he was giving a donation to Mr Peters.

Mr Peters also said Sir Robert was wrong when he claimed Mr Peters had asked him for the donation.

Mr Peters told journalists they should ask the Spencer Trust what they did with the money.

“I have been advised by party officials at the time that there is nothing NZ First is required to disclose arising from the Spencer Trust,” Mr Peters said.

The headline is that Peters has suggested Sir Robert’s memory is fading. I suspect that was very unwise of him.

He has issued a press release:

1. The Glenn contribution went to my barrister Brian Henry. As soon as I learned of it I informed the Prime Minister and alerted the media.

But he never thought to ask Brian earlier if the mystery $100,000 donor was Owen Glenn.

2. The issue of taxation on this contribution is without merit. Legal experts have said so.

Which legal experts? Opinion is divided as far as I can tell. In the end not that big an issue as the IRD will form its own view.

3. No gift duty is payable. Gift duty is based on the laws of the country where the donor is domiciled.

See earlier post for differing views on this.

4. No declaration of pecuniary interest is required. This was made clear by the official advice given to Nick Smith as he revealed in the House this week.

Not at all. In fact Nick Smith did declare a beneficial interest.

5. The Vela cheque is lawful.

I don’t think anyone has suggested it wasn’t. The issue is the hypocrisy of hiding your large donors when you rail against other parties that do the same.

6. The Robert Jones claim that he gave $25,000 to New Zealand First?

- The cheque was made out to the Spencer Trust.
– The cheque was not made out to New Zealand First.

Here is where he just won’t front up, and just states a truism. Everyone knows who the cheque was made out to. The issue is why NZ First representatives are soliciting money on behalf of NZ First and asking for it to be paid into The Spencer Trust.

Is Peters really saying that Sir Robert Jones decided on his own initiative to donate $25,000 to a trust he has never heard of, and that it is unlinked to NZ First?

And never mind the hypocrisy of his attacks on other trusts.

- I have been advised by party officials at the time that there is nothing New Zealand First is required to disclose arising from the Spencer Trust.

Your own President and Deputy Leader say they have never heard of The Spencer Trust so how could they know anything about what the Spencer Trust may have done on behalf of NZ First?

7. Neither I nor my barrister has any involvement with the Spencer Trust.

Note the careful use of language. He says “involvement”. That doesn’t mean he doesn’t know exactly who has paid money into The Spencer Trust and what that money has been spent on. Knowledge is not involvement.

And what Winston doesn’t matter is that his brother runs the Trust. Are we to believe this is a coincidence? And can Winston explain why members of his parliamentary staff were soliciting money for the Spencer Trust?

8. The claim that the 1997 Cushing case settlement of $125,000 was paid by an anonymous donor is untrue. I paid the costs and have offered to show the reporter in question the details. This offer has not been taken up and no withdrawal of the claim has been published.

However it is a mystery who paid the $40,000 costs to Bob Clarkson in the 2005/6 case?

I can’t wait for Sir Robert’s reaction!

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