TaxBlog

The Herald has an article about a recent English immigrant to NZ. The article says that he may leave the country because he will be paying $30,000 more per year in tax, tipping his business from the black into the red.

Upon thinking about it further, the new tax is a bold introduction of a capital gains tax on shares. The Labour government does not market the move as such, but that is what it is, a capital gains tax. The government calls it ‘a tax on overseas investment’ or ‘the investment tax’. Lets face it, the Labour party is smart. A capital gains tax would be political suicide given New Zealanders aversion to anything by that name. So they have resorted to their usualy tactics, come up with a capital gains tax, leave a big carve out for property, and then rename it something else. Bingo, the general public are happy because capital gains on houses aren’t being taxed.

Another marketing tactic that the Labour party seem to be using to promote the tax is that it will only be applied to those who are ‘rich’. I listened to Cullen on the radio the other night and that was all he emphasised… The tax is not for ordinary New Zealanders, the tax is only for rich people who can afford to invest overseas, and of course if you can afford to invest overseas, you can afford to pay a small tax on unrealised gains.

What are the odds that the ‘investment tax’ will later be extended so that it covers property? Pretty high given that the Stobo report recommended having a singular regime called the IST – Investment and savings tax. The same marketing approach will then be used… The tax is only on rich people, and the general public will think that it’s great.

The government will then wait until the majority on New Zealanders are caught by the tax because of ‘bracket creep’.

This reminds me of this quote by Alexander Tytler:

A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury.

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Tax evasion isn’t a new topic. This article from the SMH seems to indicate that most people where they can do ‘cashies’.

On a more economical level in the US they are trying to estimate the size of the tax gap.

The tax gap is the difference between the estimated amount taxpayers owe and the amount they voluntarily and timely pay for a tax year.

In February 2006, the IRS estimated the US gross tax gap at $345 billion for Tax Year 2001. The full report is here for those keen on some bedtime reading.

This begs the question – how big is the tax gap in NZ? We know the black market is sizeable. Perhaps 2 – 3 billion dollars per year in revenue not declared to the government. But what about your average taxpayers? How much on average does each taxpayer understate their taxable income by? Even if the answer comes in at around 10% that is a lot of tax the government is missing out on.

How to solve the tax gap is another question all together.

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The NZ Hearald has an article proposing that the new investment tax changes may not actually cause an increased investment in NZ shares. Arcus has conducted financial models which suggest that the lions share of the money moving out of international stocks may move to Australia.

Not the policy effect the government was hoping for…

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Mary Holm, better known as the investment collumist for the NZ Herald has written a column regarding the new investment tax changes. She believes indirect investors in international shares who expect to be worse off under the Government’s proposed tax changes will, in fact, be better off.

Her thinking is that the separation between index funds and active trading funds will end. Funds which were trading in shares will now be taxed on their capital gains to 85 per cent, instead of being taxed on 100 per cent of thier trading profits. She concludes:

International index funds will not end up worse off than their active counterparts. They will merely move from a favourable position to a neutral one. Investors in active and index funds end up paying the same tax under the new regime.

This is clearly flawed thinking. Firstly Mary Holm does not state her considerable bias towards advising people to invest through managed funds. Many people do not invest through managed funds. These people will, without doubt be worse off under the new rules if investing anywhere other than NZ and Australia.

Next, if people follow Mary Holm’s advice, and diversify internationally, they will be worse off under the new rules.

Finally her comparison is ridiculous, she uses a double negative when stating that index funds will not end up worse off than their active funds. What she really should say is that non trading funds investing outside NZ and Australia are now considerably disadvantaged. This Mary, is why people are adverse to the new rules.

Unless your tax advisor has already told you about how to get around the new rules.

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NZ First is proposing to remove GST on petrol. They claim this would save the motorist 20c per litre, which equates to $11 per tank.

Interesting thought.

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Apparently the IRD believes people are still inherently honest.

The Internal Revenue Department says it will rely mostly on people’s honesty to comply with the new tax on foreign share investments, which experts say will be tough to police.

Asked how the IRD could discover if an individual had foreign shareholdings, Butler said the IRD can swap information with other countries and monitor money coming in and out of New Zealand.

Lets face it, the regime is very difficult to police. How will the IRD obtain information about peoples shareholdings in the United States? Mr Butler says that the IRD will obtain the information from “other countries”. I believe Mr. Butler is reffering to the double tax agreements with other Revenue authorities. The IRD does not have the power to obtain information from the New York Stock Exchange.

Here in lies the problem, the IRD believes people will voluntarily comply with the regime. The average taxpayer would conduct some kind of cost benefit analysis. The benefit of complying with the new regime is paying more tax, and not being exposed to penalties. The down side of non-compliance is the possibility of getting caught. If that possibility is small, then the average taxpayer with 100 shares in Microsoft is unlikley to go to the expense of seeing a tax agent to comply with his tax obligations.

Lets now examine the regime from another angle. The rich will all comply with the regime, all be it that they will comply to the extent they will have to. More often than not they will find ways to take themselves out of the regime. Take this example of how to get around the new regime:

“For example, portfolio investors could pool offshore investments in a New Zealand holding company which would then invest in a controlled foreign company resident in a grey-list country,” Bell Gully said.

The firm said that the “branch equivalent” method will continue to be available to investors as an alternative to the new rules.

Under this method, profit or loss in the foreign company is attribtuted to the investor in proportion to their interest in the company.

Scoop.co.nz has a commentator who makes the following comments:

The investments need to be revalued in NZ dollars, so that a portfolio in the US that fell in value in US dollars but appreciated in Kiwi dollars because of the fall in the currency attracts a capital gains tax even though no shares were sold.

We predict the tax will lead to widespread avoidance. Just what exchange controls lead to. The advice now to those doing their OE is to open a foreign bank account and never tell the IRD.

It will be interesting to see what impact the new regime has on New Zealanders investment decisions, or whether there will be loopholes in the legislation.

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The IRD’s Maori motto is Te Tari Taake.

According to the Maori dictionary Te = The and Tari = Department. I have not been able to find a translation for Taake?

One possible suggestion is that Taake = Take

Which would mean that the translation is The Department which takes…

Interesting thought!

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This is an interesting story from America about how the Senators on the Finance and House Ways and Means committees pay tax agents to complete their tax returns.

Even more interesting is some of their comments:

“It’s onerous and everybody knows it,” said Rep. Richard Neal, D-Mass.

Isn’t that like kicking yourself in the head? One of the few people who can change the tax system is saying that he doesn’t like it.

How about this one for stupid quote of the week:

Rep. Jim Ramstad, R-Minn., does not do his own returns, but he agreed it might be a good idea to try. “I think it is important that we operate in the real world,” he said.

He’s saying he’s not in the real world? No, no he’s in political world.

And to top it off:

“This… is truly revolutionary because no one can remember the last time a member of the tax-writing Senate Finance Committee actually completed their own tax return”

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Australian low income earners are paying more of their income in tax:

New figures from the Organisation for Economic Co-operation and Development show that average tax burdens have risen for all workers, with the biggest increases for those on the lowest incomes.

A person on about $33,000 a year, or two-thirds of the average wage, now pays 20.3per cent of their income in tax, compared with 18.4per cent five years ago, because of the federal Government’s failure to adjust the tax scales for inflation. After allowing for inflation, that is an increase of 10.4per cent in the amount of tax paid.

One would think it’s a politically bad move to be seen to be taxing lower income earners higher amounts. This isn’t a political blog, but it would seem that an article like this wouldn’t do a governments popularity any good. It’s the kind of thing that the opposition would use to help boos their popularity. ‘Bracket creep’ in NZ would be worse than this, so why hasn’t the National party gone to town with it?

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Australia is looking at scrapping return filing for salary and wage earners.

“We will be reviewing the non-lodgement of returns in Australia and whether it’s caused by taxpayer lethargy or lack of resources among tax agents,” Mr Vos said.

Australia’s tax system is thought to be too complex — with too many deductions, loopholes and concessions — to follow New Zealand and Britain and allow taxpayers with simple affairs not to lodge a return.

Really, Australia should catch up to the rest of the world. If their tax system allows it, and withholding taxes on salaries are about equal to the total tax payable for taxpayers, then there is no reason to require taxpayers to file returns.

If concessions and rebates are given, then they can be made by completing forms ‘outside’ of the tax return, as is the case in NZ with rebates on donations made to charities.

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