The Week in Tax: fringe benefit tax, how workable is the Greens Party's wealth tax? And is unemployment insurance on the cards?

The new car sales results in July turned up to be something of a surprise, with 8,400 new passenger vehicles sold, which was more than 3½% higher than the corresponding July last year.  However, overall passenger new car sales are down 23% over the first seven months of July of this year, which makes July's results seem very strong.

What caught my eye about these results was that SUVs represented 77% of the new cars sold in a month. That's the highest ever. Sales of SUVs have been growing in popularity for a variety of reasons. And one particular subgroup which has had strong growth in sales is the twin cab ute.

This brings us back to the question of the fringe benefit treatment of twin cab utes. This is a topic which we're going to hear plenty more about as Inland Revenue gets round to thinking ‘You know, maybe we might need to collect some tax to pay for all this support we're providing to the economy’.

Fringe benefit tax (FBT) is calculated in one of two ways. You can either take 20% of the GST inclusive cost price and apply that to the vehicle, or you can take the motor vehicles tax value, which is the original cost less the total accumulated depreciation of the vehicle as at the start of the relevant FBT period. That latter option, the cost price, comes down to a minimum FBT value of $8,333.  You then tax the resulting value at the FBT rate, which generally speaking is 49%.

Now, just as an aside, the SUVs represent very good value for money, particularly twin cab utes. For $30,000 you can get a reasonably well spec’d vehicle. And this is one of the problems that electric vehicles which represent an insignificant amount of new car sales is they're expensive. Consequently, because they're expensive and FBT is driven off the vehicle value, it means that unless a company has made a very big commitment to the use of electric or hybrid motor vehicles and imposes some fairly stringent rules around their private use, hefty FBT bills will ensue. So, this is a major disincentive for their purchase.

Coming back to twin cab utes, the myth has been around for quite some time that these, if properly signpainted, represent work related vehicles and are therefore exempt from FBT. There's plenty of anecdotal evidence I've discussed before about widespread non-compliance or non application with the rules around work related vehicles.

Inland Revenue hasn't said anything publicly about this although we understand in the background an initiative was under consideration, before COVID-19 rather took its eye off the ball.

But a key point, which people must understand, that if a vehicle is available for private use other than travel from home to work or incidental travel, then it is not a work related vehicle, even if it is sign-painted.  It is therefore subject to FBT. This is the bit which I think is going to potentially trip up a lot of tradies and other users of twin cab utes. You have to make sure you are compliant with the FBT rules around private use, which are pretty stringent.

As I said, this is a matter that I have talked about beforehand. Inland Revenue’s tools for dealing with this are much stronger now because it actively searches social media. At one tax conference an Inland Revenue represent said that if it saw someone put a photo on Facebook about going fishing and showing the ute towing a boat, it would happily drop a quick message through the myIR system to the effect of ‘Hey, we see you're enjoying your fishing. Did you make sure you complied with the FBT rules?’ That's very Big Brotherish, but it's what it can do.

And so, you can't say you've not been warned. I expect that we will start to see a significant increase in Inland Revenue investigations of FBT for the work-related vehicle exemption and twin cab utes.

The Green Party wealth tax plan

Moving on now into the election season. And some of the parties have released their tax policies. Others will either not do so or have already made it clear, as National has, that they don't propose tax cuts or tax increases.

But the Green Party came out and announced as part of their Poverty Action Plan, a proposed wealth tax of 1% on net worth above $1 million and 2% above $2 million dollars net worth. (This is per person, by the way.)

Writing this week in the Herald, former member of the Tax Working Group, Professor Craig Elliffe, took a look at the Greens policy.

He noted that when things settle down, there's quite likely going to be a requirement for more taxes to pay down some of the government indebtedness. And noting that the Tax Working Group itself had suggested that the tax system needed to look at the taxation of wealth and capital, Professor Elliffe then looked into the Greens proposals and raised the question whether a wealth tax was the best form to deal with these issues. And his short answer was no.

The whole article is well worth read. Professor Elliffe pointed out that wealth taxes have declined in use: 12 OECD countries had a wealth tax in 1990, but only three, Norway, Spain and Switzerland retain them now.  Add in Argentina and we're talking about only four countries of any substantial size having a net wealth tax. You do, however, find plenty of transfer taxes, such as inheritance tax gift duties.

And most of the OECD members also have a capital gains tax, although Professor Elliffe, for fairly obvious reasons, shied away from mentioning that.

Wealth taxes don't raise much revenue was another of his arguments. And then there's the whole question about tax integrity, what would happen in terms of tax planning, if attempts were made to introduce a wealth tax. I think that's a very valid concern.

He also raised the question of jurisdictional flight. People may move out of New Zealand and move assets into and out of New Zealand and try and attempt to limit the wealth tax. All that is perfectly valid. But I can't help but wonder whether the days of the tax havens sheltering vast amounts of wealth, trillions of dollars in fact, are actually numbered.

Every country around the world now faces major pressures on its balance sheet, with lower taxes and greatly increased debt. So, I'm beginning to think that we may see, just as we did in the last 10 years with the introduction of the Common Reporting Standards on the Automatic Exchange of Information a concerted move to end tax havens.

And that won't happen overnight because obviously there will be very significant interests pushing back against that. But governments will probably look at the issue and conclude we cannot have trillions of dollars of assets stashed away where we can't tax it at a time of such severe strain on our finances.

Now, Craig Elliffe finishes his article by noting

In summary, there is likely to be a strong need for tax revenue and standing back from the New Zealand tax system the under-taxation of capital is an issue for the variety of reasons set out in the Tax Working Group's interim and final reports. Is a wealth tax the answer? I don't believe so when there are other alternatives.

Coincidentally, the same week, same day, the Financial Times published an article which basically said higher taxes are coming.

The article argues the paradigm that we've operated under for the last 40 years since 1980 of relatively low taxes and smaller government has been broken.

Since March, governments have rightly embraced enormous deficits to limit the collapse in economic activity, protect incomes and sustain employer-employee relationships. As a result, public debt burdens are rising everywhere to levels not seen for many decades, or even ever before. According to the OECD, many of its member governments could add debt worth 20 to 30 percentage points of gross domestic product this year and next.

This is going to force a simple choice on just about every government. They can tolerate the high debt burdens indefinitely, rather than try to bring them back down to moderate levels. Alternatively, they can permanently increase the state's tax take to balance the books and start whittling down the debt. Either way, combining "responsible" policies on both debt and tax burdens is no longer an option…We may have to jettison both and learn to live with permanently higher public debt and permanently higher taxes.

The article goes on to cite the example of Japan which in 2000 had a debt to GDP, a tax to GDP ratio of 25.8% which was then well below the OECD average. This has now risen to 31.4%, which is still below the OECD average of about 34%.

And the article notes, “if Japan is a harbinger of the future for all rich economies, then expect public debt to stay high and taxes to move higher”. So that's going to be a reassuring thought to be considering when we listen to what the politicians talk about tax going forward.

An unemployment insurance scheme coming?

And finally this week, something interesting popped up, which was also slightly related to a Green Party policy in relation to ACC. Grant Robertson, the Minister of Finance, raised the idea of a permanent unemployment insurance scheme.

Now, this is something that the ACT party has also advocated. As the Productivity Commission noted most OECD countries have some form of employment and unemployment insurance, which people can draw down for a set period of time if they lose their job. This tends to help people in employment on middle and higher incomes,

We don't have unemployment insurance at the moment. Instead we have Jobseeker Support, which at $250 a week is substantially well below what the people who've just lost their jobs were earning. And that is why the Government introduced a special package for people who have become unemployed as a result of Covid-19 since February, basically paying them close to double what’s available under Jobseeker Support.

Another option might be to significantly increase benefits, which is what the Welfare Expect Advisory Group recommended. But that, of course, means putting more strain on the government's finances which leads us back to the question of whether higher taxes are needed.

And on that bombshell that's it for this week. Thank you for listening. I'm Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you find your podcasts. Please send me your feedback and tell your friends and clients. Until next time, ka kite anō.

This article is a transcript of the August 7, 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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