Kiwiblog

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.

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!

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.

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.

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.

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).

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.

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.

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!

I blogged on Tuesday some expert opinion on the tax issues around Owen Glenn’s donations. I discovered a surprisingly high number of lawyers read this blog and many of them contributed to the thread. Many suggested the gift duty was dependent on whether Owen Glenn was a NZ tax domicile.

Mark Keating, who was quoted in the Herald also, has sent me a response to the comments:

I quote sections of the Estate & Gift Duty Act 1968 to establish that, regardless of the residence of the donor, the money is still subject to gift duty.

First, the definition of “gift” in s 2 is:”any disposition of property, whereever and howsoever made”.

That is pretty wide you will agree!

Second, that general definition in s 2 is further expanded upon to include a whole range of transactions where 1 party gives / receives more than the other (ie, any bargain that is intended to be unequal is effectively treated as a gift – so I cannot sell my house to you for $10 and say “that is just our contract”.  If the bargain is unequal, then it will be considered a gift under the Act).  The list of those examples of what kind of transactions can be gifts is, not surprisingly, very long … but it specifically includes:

” the payment, release, discharge, surrender, forfeiture or abandonment of any debt”.

So beyond any doubt (as you would expect) the payment by Owen Glenn of $100k of Peters’ legal fees is a “gift”.

But the residence issue is dealt with elsewhere, in s 63(1).  It specifically says a gift is subject to gift duty if it is made by a person who is domiciled in NZ (category 1, which will not apply here) or (category 2):

“all property situated in NZ, comprised in any gift made by any donor to any donee, where the donor is domiciled OUT OF NZ at the date of the gift” (my emphasis).

So it DOES catch donations made by persons who are not domiciled in NZ, provided “the property is situated in NZ”.  In those cases, the residence of the donor is irrellevant.  The people who made comments have only identified category 1, and ignored category 2 gifts.

So you have to determine IF the property “is situated in NZ”.  That is determined by s 63(2), which lists when (and when not) property is “situated in NZ”.  Again, it includes a very long list of things that are caught and things that are not.  But within that list is included:

“(e) a debt owed by a person … is treated as property situated in NZ if any of the debtors are resident in NZ”.

So:
(1) the debt was WP’s personal legal bill, and
(2) WP is resident in NZ, then
= the debt is treated as property situated in NZ = so gift duty is payable upon that debt.

And I have to say, that is the LOGICAL result.  Would your commentators really expect that $100k given to pay a NZers debts in NZ is not subject to Gift Duty.  I mean,  come on (!) – IRD are a bit smarter than that!!!  To have this kind of donation excluded would be a MASSIVE loophole in the Act.

So you can confidently respond to those who have made comments that the residence of Glenn IS irrelevant.  The legal debt owed by WP (who is a NZ resident) is sufficient to mean the gift is subject to NZ Gift Duty.

I am not a tax lawyer of course but Mark’s comments seem very strong to me.

The media have started to look at the tax issues around the secret $100,000 donation. It is indeed quite probable that there is an unresolved tax issue around it.

A tax lawyer has helpfully made the following points to me:

• Normally gifts are not considered to be income but it can extend to include “gifts” given for extra services or additional benefits beyond expectation.
• If Owen Glenn gave the $100,000 as a mark of satisfaction with Winston’s past services as an MP or in the expectation of some future benefit to be bestowed, then the money would constitute income.
• It is irrelevant that the money was paid to Brian Henry and not to Winston personally. The Income Tax Act is very clear that, as it was Winston’s legal bill that was being paid, it would be his income.
• Bank and lawyers’ trust account records are not protected by legal privilege. The Tax Administration Act expressly states IRD can have access to all financial records. There is no “privilege” in payments, only in legal advice.
• Even if the secret donation is not treated as income for Winston, and is a “genuine gift” then the Estate and Gift Duties Act applies.
• A gift of $100,000 would attract gift duty of $12,850.
• When a gift is made, the Act requires the person making the gift to pay the duty within three months.
• If the giver does not do so, the liability automatically passes to the recipient who must then pay the gift duty.
• A failure to do so constitutes a criminal offence under the Tax Administration Act.
• Interest and penalties on any gift duty not paid on time would have more than doubled the original $12.850 owing.

Now assuming it is seen as a gift and not income for services provided, it is possible Owen Glenn paid the gift duty. If he did not then it sounds unlikely it has been paid, as Henry and Peters keep arguing it is not a gift. That means the liability would still be resting with Peters.

Very interesting to look closely at the words in the media from Brian Henry and Mike Williams this morning. In the Herald:

Winston Peters’ lawyer says a tip-off led him to approach billionaire Owen Glenn for a large donation to the NZ First leader’s legal bills.

Now this tip-off could have been from Winston or from Mike Williams. Also of note if Henry says he solicted the donation while Winston Peters in his February perss conference said that they never approached or asked anyone for money. Of course what Winston meant was they never solicit donations to NZ First but they go hell for leather for personal donations to his legal fund.

Brian Henry said last night he asked the Monaco-based businessman for help after another donor did not deliver.

How many secret donors have there been?

“We made it well known around friendly political circles – or I did – that I was looking for a donor.”

Doesn’t that sounds like a perfect description of Mike Williams?

Mr Henry said he could not recall who had advised him to contact Mr Glenn when the original funder of the legal action fell through, but it was not Mr Peters.

Nor was it Mike Williams, the president of the Labour Party which has also received Glenn donations.

“I can’t off the top of my head remember who it was who told me to call him.”

Oh of course. You can not remember who told you to go hit Owen Glenn up for $100,000 but you can recall it wasn’t Winston or Mike Williams.

Mr Henry said no fund or account for Mr Peters’ legal bills existed.

“The position is that the money is used to pay an existing bill, full-stop.

There is no fund. There is no cash sitting in a balance anywhere. There are bills to be paid.”

Now this is fascinating. Because paying off a bill on behalf of Winston Peters is effectively a donation to him, and there are definite tax implications for that. More on that later.

But let us turn back to the requirements of the Register of Pecuniary Interests:

a description of all debts of more than $500 that were owing by the member that were discharged or paid (in whole or in part) by any other person and the names of each of those persons,

So Brian Henry has just confirmed the Register is incorrect for Winston Peters. And Winston would have been well aware that his legal bills had just dropped by $100,000. Plus it is possible he gets Brian Henry to file his annual return, so any excuses for an incorrect return are shot.

Mr Henry would not discuss why he had not alerted Mr Peters about the donation in February, when Mr Peters denied Mr Glenn had made a donation.

It was of course logical and sensible to let your close friend and client remain in the dark.

Asked about pecuniary gain, Mr Peters told NZPA he did not believe he had benefited personally from the arrangement whereby his legal bills were paid by anonymous donors and he paid the shortfall.

Mr Henry concurred last night.

“There is nothing I am aware of where someone contributing towards a bill you have incurred needs to be declared.”

These men are lawyers? They have to be kidding. They think paying a bill on behalf of someone is not beneficial. Hey let’s pay off Winston’s mortgage for him – that doesn’t count also.

What they say also is directly contradicted by Standing Orders and the Register of Pecuniary Interests.

Henry’s insistence that paying off Winston’s bill isn’t a donation to Winston strongly suggests he did not pay tax on that donation. I suggest a question the nice Peter Dunne, Minister of Revenue would be in order:

“To the Minister of Revenue: What is the position of the Inland Revenue Department as to liable tax if an individual has another individual pay $100,000 debt on their behalf”

Also yet to be resolved is if that $100,000 donation was in any way linked to the large closer to $100,000 than $10,000 sum which appeared in the NZ First bank account in December 2007?

A fascinating story by NZPA in the Herald:

Inland Revenue canned a KiwiSaver brochure because of fears it would be used for electioneering, despite at the time saying it was pulled for commercial reasons.

This came after Mike Williams endorsed the suggestion of a Labour NZ Council member to use IRD brochures to electioneer.

Mr English said the IRD should come clean and release the scrapped brochure.

Yes they should.

And also of note:

Solicitor-General David Collins, QC, told MPs that advice and legal action concerning the act had created a significant workload for the Crown Law Office.

This was due to departments taking a cautious approach and seeking advice on the law and whether they would be breaching it.

The office was also involved in two court cases, and another was to begin shortly. Dr Collins said he was also aware of a number of other upcoming legal actions.

But Mr Dr Collins, your Minister of Justice said the law of common sense would apply!

Justice Minister Annette King was also quizzed about why the Electoral Commission was taking so long to respond to a request for rulings on whether material breached the legislation.

Ms King said the commission was an independent body and questions should be put to it.

She said there had been a request for more funding but as far as she was aware the commission had adequate resources.

An IRD spokesman said that it was its job to keep people informed about their obligations and their entitlements.

This is crap. It is outraegous the Government has not given the Electoral Commission more funding. Even if it was a sensible law, the EFA gives considerable extra workload to the Electoral Commission (which was basically just a CEO, a Comms person and someone who answers the phone) which would necessitate extra resource for them. Add on the murkiness of the EFA (which the Commission CEO publicly warned about) and it is somewhat scandalous the Government has refused extra funding.

Back to the IRD:

“We had originally planned for a KiwiSaver information leaflet to go to all households but given the high uptake of KiwiSaver we decided earlier that it did not need to go so widely.”

Well yes as every worker is opted in when they change jobs, and as pretty much every employer gives employees info on KiwiSaver, there would be little need for a pamphlet to every household. I wonder who suggested there should be?

My God. The January Crown Accounts had a $600 million error in them. IRD failed to update the provisional tax take, which is why tax revenue was around $700 million below forecast.

Vernon Small blogs that Cullen is furious. I would be also. This is not a minor error. And the fact that the tax figures were below forecast for the first time ever, is all the more reason why it should have been triple-checked.