The Week in Tax: proposed changes to the late payment penalty regime for Child Support. Millionaires want tax increases but the EU’s bite of Apple goes sour. And last days to organise a tax pooling payment for the 2019 tax year

Longtime readers, listeners of this podcast, will know that I am a long-standing critic of the late payment penalty regime which currently applies across various taxes. I see it as inefficient and not actually achieving very much.

But the worst late payment penalty regime is that which applies to Child Support payments, which is rather odd because the Government in this particular case is acting as an intermediary.

At present, if you pay Child Support late, there's an initial penalty of 2% of the late paid amount immediately and then a further 8% of the late paid amount still outstanding eight days after the due date. So that's a 10% straight up penalty. By contrast, if you are late paying tax, the initial late payment penalty is 5% if you haven't paid it within eight days.

In addition to this initial penalty incremental penalties are then applied.  These are 2% of the outstanding amount, including penalties, from one month after the due date for the next twelve months, and then 1% of the outstanding amount, again including penalties, each month thereafter from 13 months after the due date.

Now, the issue of Child Support is enormously emotional and attracts quite a great deal of heat whenever I raise the topic as no one seems entirely happy with how the regime operates.  As taxpayers, we ought to be very interested in this, even when not directly affected, because the late payment penalty regime for Child Support is hopelessly inefficient and in fact ineffective.

For example, as of January 2019, the Child Support debt was $2.2 billion dollars. Now of that, only $558 million was unpaid Child Support.  The other $1.6 billion dollars being penalties. During the year ended 31 March 2019, Inland Revenue wrote off $244 million of Child Support penalties. That was actually down from $594 million written off in the previous year.  Currently, Inland Revenue writes down 97% of Child Support penalty debt at initial recognition because it doesn’t expect to collect the debt. So, a very good question is why Inland Revenue has persisted with a regime that doesn't work and there's never been a really satisfactory answer to that.

But at least this week the Government announced some changes to the late payment penalty regime. The proposal is that from 1st April 2021, incremental penalties, that is the subsequent 2 % for the first per month for the first 12 months and then 1 % per month thereafter will be abolished. This measure has been brought in as part of a supplementary order paper to an existing tax bill. it's a welcome move.

But as you can tell from the numbers I've just cited will it actually really change anything? The late payment penalty regime doesn't seem to work to encouraging people to pay on time. And there's still this anomaly that somehow Inland Revenue acting as an agency is entitled to charge twice the amount for late payment penalties, then it charges for people paying taxes late. That conceptually doesn't make much sense to me.

As I said, there’s a lot of emotion around the Child Support regime so there's never going to be an entirely satisfactory answer to the issue. But it is actually good to see some movement on a sore point.

Taxing the rich

Sir Stephen Tindall was one of 83 millionaires who signed a letter to governments around the world which concluded,

So please. Tax us. Tax us.  Tax us. It is the right choice. It is the only choice. Humanity is more important than our money.

This is part of a large and growing debate around the role of taxation and how much tax governments here and around the world are going to need over coming years.

The Greens have rolled out a proposal for higher income tax rates and a wealth tax. Speaking to Wallace Chapman and Radio New Zealand panel on Tuesday, I raised the issue of perhaps a capital gains tax or a wealth tax being on offer.

And a land tax was one of the other proposals that former Act MP Heather Roy suggested was an option. It’s one I think is certainly worth looking at, although it comes with quite a number of hooks in it like any tax does leaving aside the whole politics of the matter.

But interestingly, this whole question of tax reform is going to be very difficult. Apart from the politics of it as I noted, but also because for some governments, it's going to mean significant changes to their tax system.

An example of that also happened this week when the European Commission lost an appeal against its decision in 2016 requiring Apple to pay 14.3 billion Euros of tax and interest to Ireland.  The European Commission had ruled Ireland had given Apple an illegal sweetheart tax deal for more than 10 years.

EU judges this week ruled that, no, that ruling was wrong and in fact, Ireland had not acted inappropriately. The European Commission had not succeeded in “showing to the requisite legal standard” that Apple had received an illegal economic advantage in Ireland.

Now, Ireland, actually, even though it was going to receive €14.3 billion, actually backed Apple in this case because they have a very low tax regime for corporates. The Irish corporate tax rate is 12.5% and Ireland wanted to keep it that way as a means of driving economic growth, very important in this pandemic world.

And so the situation shows that although on one side you have people saying, ‘You know, we're going to need tax and we're happy to pay more tax’, governments might not necessarily be keen to follow that lead.  And by the by, it’s often said here that we want to tax the multinationals more, the case also showed how difficult that would be. 

One of the counter-arguments that was advanced by Apple, which appears to have been successful, is that the Irish subsidiaries of Apple are not involved in creating the intellectual property behind Apple's products because those are all developed in California.  Therefore, the economic rationale for taxing the Irish subsidiaries more heavily didn't exist. And that same argument would apply very much more down here.

So, there's a lot going on in the international tax space and the OECD will continue to try and to get a global consensus on the matter. But the American Treasury Secretary has torpedoed that move. And the American tech giants are obviously quite happy that nothing happens because they would be the main targets of any major changes.

Last days

And finally, a reminder that if you want to organise a tax pooling payment in relation to your tax for the 2019 income year, you have until next Tuesday, 21st July to put that in place.

As part of its response to the Covid-19 pandemic, Inland Revenue extended the deadline for using tax pooling payments, effectively giving a further twelve months to pay the terminal tax for the March 2019 year.

And if you listen to the excellent podcasts I've had with Josh Taylor of Tax Traders and Chris Cunniffe of Tax Management New Zealand, on the use of tax pooling, you’ll know what a useful tool it is.

In order to qualify you have to have a tax pooling contract in place with a tax pooling intermediary such as Tax Management New Zealand or Tax Traders by 21st July. You must also show that in at least one month between January and July this year your business experienced or is expected to experience a significant decline (that is 30 % or more) in revenue as a result of COVID-19.

So, you've got a few days left to make use of tax pooling. and set up a contract and payment schedule to pay your 2019 tax over time and by the extended terminal tax due date in next April.

Well, that's it for this week. I'm Terry Baucher, and you can find this podcast on www.baucher.tax or wherever you get your podcasts. Please send me your feedback and tell your friends and clients. And until next time, thanks for listening. Ka kite anō.

This article is a transcript of the July 17, 2020 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission and has been lightly edited for clarity.

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