There's inevitably been a certain Groundhog Day effect to the current Lockdown now we're into our fifth week. It dominates the discourse and that hasn't really changed in the tax world. The Government has now announced that there will be a third round of the Wage Subsidy and applications for that opened at 9:00 a.m. Friday and will remain open until 11. 59 p.m. on Thursday, 30th September.
As of September 12th, there have been 427,388 applications approved for the first two rounds of the wage subsidies, which has supported over 982,000 employees and 274,000 businesses. The total amount paid out to that date is just under $1.8 billion.
To quickly recap the tax implications of the subsidy for an employer, the receipt by an eligible business is excluded income to the extent that the subsidy is passed on to the employee. The employer is not entitled to an income tax deduction for wages paid out of the wage subsidy and the amount of wages paid in excess of the wage subsidy, that is amounts funded by the employer, are deductible as normal. No GST applies to the payment.
Now, Inland Revenue just reminded people that any amount of the subsidy that is not passed on to an employee is required to be repaid to the Ministry of Social Development (MSD)because that's part of the criteria and declarations made at the time of application. If the wage subsidy isn't returned to MSD, then Inland Revenue may consider the amount not returned as taxable income, which needs to be included in the income tax return for the year in which it was received.
Now, the interesting development this week is that the Government has now said that a second payment under the Resurgence Support Payments scheme will be available and, applications for that opened Friday. Now, in order to qualify, organisations must experience at least a 30% decline over seven days for the period commencing 8th September as a result of being at Level Two or higher.
Remember, the Wage Subsidy is only available at Levels Three and Four, but the Resurgence Support Payment (RSP)is available at Levels Two, Three and Four.
Now, the income tax treatment of this is that the RSP is not subject to income tax and accordingly, income expenditure funded by payments under the RSP scheme are not deductible. GST registered businesses will return GST on payments received under the RSP and will be able to claim input tax deductions for expenditure funded by payments under the RSP such as rent, for example. The intention is any RSP received is used to cover business expenses such as wages and fixed costs.
As of 12th September, about $500 million dollars has been paid. And the Government has indicated that there could be another two payments after the for which applications opened today. These will be three weeks apart, so long as the conditions that continue to trigger the Resurgence Support Payment scheme continue to apply, i.e. the country is in an Alert Level Two or higher.
Now, there's an ongoing debate, quite rightly so, about the level of support, whether it's targeted or appropriated enough, but it's useful to see Inland Revenue is keeping people up to date as to what their obligations are. Whether the level of support is the right level or appropriately directed, well, that's another matter.
And just quickly, a reminder that there are some other schemes available. there is the Leave Support and the Short-Term Absence Payments Schemes. Businesses may still be eligible for the Small Business Cashflow (Loan) Scheme. And there’s also Business Debt Hibernation. We talked about these when we first went into Lockdown. All those four schemes, by the way, are available at Alert Level One or higher.
A very large taxpayer
Moving on, the New Zealand Superannuation Fund, which was an initiative by the late Sir Michael Cullen, has just posted its strongest ever annual return of 29.63% for the June 2021 financial year. This means that the fund has now grown to $59.8 billion dollars, an increase of $15 billion over the 12 months.
And during that period, the Government made contributions totalling $2.1 billion to the fund. Now the super fund is a sovereign wealth fund, but almost uniquely, as far as I can tell, amongst sovereign wealth funds, it's taxed. For the year just ended, it paid $2.3 billion dollars on its $15 billion. And that's because the rules around the Foreign Investment Fund and the Financial Arrangements regimes apply to the super fund. It therefore will pay a fair amount of tax, obviously, when its investment return is nearly 30%.
Making it fairer, go further
Now, of course, the Super Fund was established to help fund the future cost of New Zealand Superannuation. You may recall last week we discussed the Treasury's draft long term fiscal outlook and in relation to the growing cost of superannuation, Treasury put forward a couple of options to consider, which were increasing the age of superannuation entitlement from 65 to 67 or actually cutting back the amount of people's entitlements.
New Zealand Superannuation is universal, which is one of its great strengths. Radio New Zealand has received Inland Revenue figures which show that in the March 2010 income year, there were 2,209 people who were on incomes of more than $200,000 a year who were receiving super.
By the year ended 31 March 2020 that number had more than tripled to 7,860. And as Baby Boomers and the population ages, more people who on the face of it don't need Super will be receiving it because of its universality.
The Retirement Commissioner, Jane Wrightson, was asked about this and she said it's not a problem, because one of the great things about New Zealand Superannuation is that it is universally applied. But she did say it is a reasonable policy question, the normal answer to this has been means testing which was applied briefly in the mid-90s and applies in Australia. However, this was roundly rejected by New Zealanders in the past.
So, two questions emerge. One, how are we going to fund superannuation going forward? And secondly, is it right that it is universal and people who on the face of it have sufficient to fund their retirement are still receiving it? Mind you, you could say 7,800 people in the context of the hundreds of thousands receiving New Zealand Superannuation isn't actually that much, but that number will grow.
Now, a suggestion to address this particular issue of potential over generosity for higher income earners has been put forward by my colleague, Associate Professor Susan St John of the University of Auckland Retirement Policy and Research Centre. She has released a briefing paper updating an idea she'd first proposed back in 2019. It basically treats the pension as a basic income and then taxes pensioners’ other income at a higher rate.
And the idea is that there will be a threshold at which it becomes uneconomic to take super, thus saving funds.
The proposals is, instead of having super inside the tax system, take it outside, treat it as a basic income, and then tax people receiving other income at a higher rate. And then that would mean, as I said, once their other earnings reached a certain point they would be better off to not claim superannuation.
The issue, as has been pointed out all around by various people, is that the number of between now and 2060, the number of pensioners is expected to double. And Treasury's forecast is that the cost of superannuation, which is already our most generous welfare payments, is going to grow at one and a half times faster than the economy over that period. Therefore, its cost, relative to the economy, is going to increase.
Susan St John’s proposal is that by taxing people who are earning higher incomes this means that the payment is then focused on those who really need it. That is, those on lower incomes and that amount is likely to grow as well. And her modelling suggests the break-even point with a flat tax rate of 39% is when the other income exceeds $139,000 a year which is still pretty generous, I guess.
You can tinker with the tax rate, but it's an interesting idea. What it builds on is two things.
Firstly, New Zealand Superannuation is a type of universal basic income, which there’s always been a lot of discussion around. Secondly, it then uses the tax system to introduce a bit of equity and disincentivise excessive take up, but not too much, to be honest, because you can earn up to $130,000 in other income. This relative generosity shouldn’t really disincentivise work which is obviously one of the big problems about means testing, the disincentives it creates.
So it's an interesting idea I think. Treasury I think seems quite interested in it or appears to have had some discussions on the topic and we may hear more about it.
Well, that's it for this week. Next week, we may be discussing the interest limitation rules in more detail. We've been waiting for those for some time. And given that they come into effect from 1st October, it's going to be quite a crash course to get people up to speed by that time.
But anyway, that's it for today. I'm Terry Baucher. And you can find this podcast on my website, www.baucher.tax or wherever you get your podcasts. Thank you for listening and please give me your feedback and tell your friends and clients. In the meantime, kia pai te rā, have a great day!
64 Comments
New Zealand Superannuation is universal, which is one of its great strengths!
Why worry about wealthy retirees earning over $200,000 - they are paying over $80,000 tax to the govt. Presumably many of them doing serious work that benefits our society. Why discourage them? Almost half the Superannuation they receive is returned to the govt.
NZ Super is not perfectly universal. If my wife and I declared our relationship over and I moved out then our Super would increase and I might be able to claim accommodation allowance. Would WINZ send detectives to see if two elderly people are actually sleeping together?
It is but a small percentage of taxpayers in this exclusive rich zone. Whatever tax is collected would not be all that consequential in the overall scheme of things. But of course it would resonate politically for some, and undoubtedly popular too for more. However is this proposal not, in terms of the net result, just the same as a means test except it is being applied via a tax bracket in the wash up each 31/3 as opposed to denying the pension to the same people in the first instance?
Because human evolutionary progress depends on increasingly better living systems, including communication. That's why there are thousands of dead languages over the centuries & it's also why English is the most international language (in it's elegantly simple alphabet & gender neutral structure). If there's a decreasing utilitarian benefit of anything then there's decreasing interest because no-one has the time or energy to live in the past (unless funded by the taxpayers via the Govt).
The fact is that fluent TeReo speakers have been flat at ~4-5% for several decades (according to Census results), despite millions in Govt support & mandated public sector use: now it is to be mandated at primary school level which is equivalent to enforced brainwashing of NZ citizens.
Those who care enough about it need to use it or lose it. The rest of us need to focus our efforts & resources on things that will improve our lives according to our own criteria & judgement
English is a terrible language for communication. It is a rotten language absolutely teaming with ambiguity. I lived in PNG among people who had had all their education in English - they used English socially but when they had a tricky problem to discuss they chose Tok Pisin (PNG's pidgin). In Tok Pisin you can say anything but it is very difficult to be ambiguous. Considered by many the most brilliant book ever written Issac Newton's 'Philosophiæ Naturalis Principia Mathematica ' was written in Latin not his native tongue.
No one is arguing for the replacement of English with Te Reo although it would make spelling much easier.
I will never learn Te Reo Maori (I have minimal language skills) but I'm happy my grandchildren can count and sing in it. Of course you are right about one thing: making any subject mandatory is certain to turn children off it. Compulsory rugby at my English school turned me off it for decades.
If the govt does need to make a second language mandatory then they should choose Mandarin. Leave Te Reo as optional and many kids will learn it and love it.
Wiki = week. Take = tax. Both corruptions/transliterations of English, nothing to do with original maori and therefore adding zero in terms of conceptual understanding. Yet we look woke.
Like this guy online the other day who thought getting people to order a "kawhe" instead of coffee would save the maori language.
The thing that bugs me is popping the odd Maori noun (it's always nouns, because they are the easy bit) into an English sentence. I like the idea of preserving languages (I speak 3), and people who want to use Maori learning and using it, but English already has a word for "family", so please don't mash them together - use one or the other, or both separately. School newsletters are full of this mashed up silliness. Similarly, I'm a fan of Maori place names (or tree or bird names) - English didn't have names for those things so best use the names they already had.
I agree that littering Maori words through English is really annoying. I am sick of the word whanau being used exclusively on TV and never use it in normal conversation, and nor does anyone else in my family. We all use the word "family" and would like the respect and option of others using family when referring to us.
It is pretty insulting, when we have TV stations and programmes that are exclusively Maori, but cannot find a station that exclusively uses English. For people whose hearing is not the greatest, watching the evening news is now a nightmare, and less and less worth it.
Making Maori studies and language compulsory at primary school does feel heavy handed. Many years ago we all learned stick games, poi dances, songs, the layout of Maori villages and the names of the key buildings in them, and many, many other aspects of Maori culture, such as Maori myths and legends and New Zealand's settlement history by Maori - it was interesting because it never felt like it was being forced down our throats as happens now. Nor did race relations feel so adversarial as now.
Most language is ambiguous, unless its a programing language, or mathematics. English does have unnecessarily illogical spelling, but the most important thing about a language is to communicate so having a common language is that every body understands is the most important thing. English is by far more common than Maori, both here and worldwide and is such a more appropriate choice.
Our academic achievements are going down in schools, in maths and english, didn't we just have a teachers strike saying that teachers where overworked, we do not have the resources to even maintain the standard we have let alone virtue signal how we support Maori.
We rename our ministries Maori names but isn't the most important part of these to help people, if the majority don't speak Maori, then aren't we confusing the majority of people, in order to satisfy a minority. I understand "the tyranny of the majority", but how is the the tyranny of the minority better?
I agree. Just wait till we have road signs in Maori, to be "woke", and people start dying on the roads as a result. There is a real arrogance to insist on naming every government department and public building in Maori - which means nothing to most people and is confusing to the majority of the public - who pay for these services through their taxes.
Tax the rich sounds great. Especially to someone like me who is not rich. Trouble is it doesn't work - put tax rates much higher than they are now and the most productive people in our society will work less or emigrate. It would encourage accountants and lawyers to create schemes to minimise tax.
Rather than worry about the rich think about the poor. The solution is universal benefits and especially universal child benefit. RBNZ should have issued helicopter money to all NZ inhabitants rather than spending billions that seem to have had little effect other than making my house more valuable. I appreciate becoming a millionaire in theory but I just have the same home and now my four adult children look as if they will never own property.
As someone who objectively is rich, I think the rich should be taxed more.
A lot of the people I work with are now paying a fair bit of income at 39c in the dollar. Noone really noticed. None of us are going overseas, we have well paid jobs in an incredible city.
We work hard, but no harder than someone in a factory, hopefully we work smarter as we're paid exponentially more.
Any excuse I could think of why I should pay less tax (or not more) is purely selfish.
There are many ways of raising tax. Income tax, customs duties, GST, death duties, compulsory Kiwisaver, etc - when pushed too far they crumble. I'd agree 39% is not an absolute max for income tax but judging by the UK it is roughly the right level - put it to 60% or 98% and it will be avoided and raise less. Surely the aim of tax revenue is to provide public services: infrastructure, teachers, hospitals, etc so raising it to an unproductive extent is dumb although it does make the envious feel good.
You are assuming it is office workers earning 39% - I was thinking of a skilled specialist gas fitter who earns $250k pa; it is only his sense of obligation to his customers that keeps him working everyday.
"Surely the aim of tax revenue is to provide public services: infrastructure, teachers, hospitals, etc"
Perhaps there should be a bit more of an effort to prove competence on the part of the state to prove it is still capable of these things before it goes rejigging the long-held social contract around retirement. Not a huge incentive for Kiwis today to stick around and pay out pensions to those who have already made this a horrendously expensive place to live when they're being told they will have to provide for themselves as well, and no assurances that we'll see an extra nurse or teacher to show for it.
You are probably already paying 5 times as much income tax as a factory worker:
Worker on $45k pays 6.5k tax
Worker on $120k pays 30.5k tax
https://www.paye.net.nz/calculator/
I don't think you are being overly selfish not handing over more.
The Greens would vehemently disagree. What’s more their intention is to create a modern version of the doomsday book and tax you as well on your assets and maintain a file annually on said assets and in fact have right of entry to your home to ascertain whereabouts and fate of said assets. And obviously the first up prime candidates for such auditing and collecting will be such as those earning $120k pa and more, I would suggest. The Magna Carta for centuries has been the foundation for equitable rule under our law, but not for the Greens. Out the window it goes.
There are some industries and occupations we need to tax less to encourage them to stay here and work longer. Doctors, teachers, builders and property developers spring to mind. I hear you saying, not property developers, tax those greedy and rich evildoers more. By taxing more, lets say 50 percent of the profit, it makes developing less attractive so either they will pass on the cost or just decide not to bother at all. The country suffers.
I say don't tax them less but pay for their education more, people only need enough to live reasonably comfortably. But if you make them have a couple of hundred thousand dollars worth of debt after schooling, plus the prospect of spending a million dollars on a shack, what choice do you leave apart from make insane amounts of money or move overseas, to make even more money.
We need people to be able to live, the insane house prices we have now means every body needs to make a fortune just to have what I would consider a basic human right, as secure place to live. If everybody needs to make a fortune the everything goes up in price and the cycle continues.
I am all for universal benefits but if you do not tax the rich, how do you pay for these? If the rich flee, then they should lose access to the markets of the country they are abandoning. There will always be others to take their place who are more keen on sharing their wealth.
The problem I've seen in Super among my own grandparents, is that if you own a house you can live well off it, but if you're renting it will be a real struggle.
I wonder if a scheme of building say 1 bedroom apartments for the elderly, basic but adequate, and reduce Super by say $200 per week, but give people the option of either a state supplied apartment, or an extra $100 per week. I would expect most elderly homeowners to opt into the $100 payment, the net effect being to save a bunch of money. And for elderly non homeowners you'd take a significant form of stress away by giving them better housing security. Obviously the numbers will need some tweaking.
As a kid I lived next to a council run village. It was the norm and provided accomodation for those less fortunate. There was a caretaker on site, and people were well looked after. The rise and rise of the mega council in Akld has been the demise of any form of caring for the less fortunate elderly, and the demise of pride in the local area.
"Payment is then focused on those who really need it"
As a young family, we will not qualify for any assistance once our baby is one year old. Am I right in assuming that when I then come to retire, I will likely not qualify for any assistance, after having spent the early part of my career repaying a student loan? Yea, no thanks. I think NZ is going to be a great place for those who want to wing it and let everyone else pick up the tab. Not so much for people who want to get ahead in ways that isn't just hoarding investment property - they're just going to get handed the bill. But we won't stick around to find out.
The proposal means that once non pension income is over $139k the excess tax would mean takeaway money would be the same as if not claiming pension and paying a lower "non pensioner" rate of tax. Effectively a sort of means testing, based on income alone. I think it's fair and far preferable to the Australian style income and assets (with deemed rate of return) test. In Australia a single person gets no pension with income over about $50k or somewhere about $600k non house assets.
Sure, but with an aging population and fewer young people to pay, there will be a significantly greater burden on those younger people to pay more tax (while paying their large mortgages). So it seems to make sense to reduce that burden by taxing some of the extra income from the older people who have their paid off homes. Perhaps increase accomodation supplements if needed for older renters, and maybe allow tax deductible private health insurance. In 30 years or so if population demographics change and things can be adjusted again.
That's the problem, super goes from something people are already paying taxes to cover now for the population bulge (plus any extras who qualify after we import them), covering huge mortgages, perhaps facing likely negative equity at some point over that timeframe AND on top of that being expected to save for their own post-work incomes.
It's too late, really, to start having this discussion when owning your own home at retirement is going to become a major challenge for Kiwis under 40. Between the 30% I'm meant to be saving for my retirement (That's always mooted as being in addition)to the pension, not instead of it), the 35% that my mortgage mops up and PAYE, there isn't actually anything left for Kiwis to, you know, have families or life any sort of existence worth living - there simply isn't any scope left for saving for our own retirements as well.
And I would contend this isn't exactly a new issue, except we've managed to kick the can down the road by giving the boomers a big fat tax-free payday by inflating the value of their family homes, so they have a decent nest-egg; too bad about the fact they've forced younger Kiwis to commit 30 years of our future wages to cover it. So remind me again why I should watch the ladder being pulled up again by the people who got us into the mess as they insist that this time they've got the solution?
Good summary of a screwed up situation.
I'm a renter pushing 60 with children in primary school, so I'm in the same boat as the kids in their 30s but with even worse prospects.
I very occasionally post something like this as a reminder that, although the tuning has stolen from younger generations and fed boomers, not everyone of my age is a happy winner who can't see the problem.
I don't quite see your point, why do you think that someone who owns their own home is in such a better situation than you. In New Zealand the government will pay for accommodation if you need it. If you own you own your own home then sure you have a house to live, no different from you. You may be able to get a reverse mortgage where you basically give your life times worth of savings back to the bank. From heartland bank if you are 65 you can borrow a maximum of 20% of the value of house.
If something goes wrong with your house, well no land lord or government agency is going to fix it, or re-insulate your house for free. Painting your house can cost $30,000, a driveway $50,000 to $100,000. So basically you can redo your driveway and paint your house 3 times on a reverse mortgage. You can't sell your house you need somewhere to live. You can sit in your house hoping that you won't get need to go into a retirement home so you can give a fraction of your house to your children, lets say you have 2 they still up for a $500,000 bill each, if house prices don't go up, yeah right, and then what about their children?
The only thing you really have is the ability to say you are a millionaire, and have people be envious and angry at your so called wealth.
Making Health Insurance tax deductible would be sensible, as it would enable more older people to keep paying into the policies they have held for most of their working lives - rather than having to drop them after retirement and join all those people relying on the already stressed public health system. The premiums from age 65 are horrendous. But from then on is when health costs of a person really escalate as physical condition deterioriates. Private Health Insurers' soaring premiums for older people get rid of them off their books - just at the time they get expensive
Exactly how it worked. Sadly it feels today though that there is a big chunk of society that is not able to contribute to the tax pool, and has no expectation to contribute to it but expects to be supported for life, so those working will be asked to contribute more.
It does not feel fair to me that working people are under constant pressure to perform at work and managing their kids after hours and paying for childcare, when on weekdays (normal work days) I can go to any local Mall and find it full of apparently unemployed people of all ages, totally relaxed, and eating expensive takeaways (that I can't afford as a retiree) and then, when the benefit money is gone, is it off to get a food parcel that someone else pays for?
There seems to be a major gap in education to be self sufficient, able to budget, able to produce meals - even if just assembled from supermarket food. A lot of the practical school subjects from Intermediate level have been discontinued - yet Maori, etc, is being made compulsory but will not add to students' ability to be independent in the community.
They will also have less money throughout their working lives that they can't access until 65 - which is fine if you are making enough money to cover the increases in living costs over your entire career. How many people have had 30% pay rises to match the increase in house prices over the last 12 months?
Bad idea. Keeps the poor in poverty even when retired. My daughter pays KiwiSaver out of her living wage - the more she puts into KiwiSaver the less for feeding and clothing her daughter - she already has to ration use of the heater. After 40 years earning the living or minimum wage she will have KiwiSaver savings a mere fraction of those the better paid (say policeman, teacher, journalist). I'd accept your proposal if there was a very generous universal child benefit.
I think it would be better to start by providing decent tax concessions - no one is going to want to be forced to put money away at their PAYE rate. Sure, that means high income earners can save more easily, but they'll also be means tested out of the government pension eventually. It might one day become compulsory starting through an employer levy, though that could mean future pay increases might be less. It's a fairly long process to get to a viable system, but making Kiwisaver more attractive would be a start - at the moment, after the $500 free money for locking away $1k, what's the point of it.
Edit: Forgot about the employer contrib (opted out years ago). So there is an effective 4% pay increase. Still should be concessionally taxed.
NZers who move to Australia in their later years need to now wait until 67 to receive the Aus Pension (which is kind of based on their NZ Super eligibility or similar) and is means-tested. However if NZers have worked in Aus for a reasonable period they are likely to have a lot more in their Aus Super than they would have in KiwiSaver .
The quicker we transition to a compulsory superannuation scheme like Australia the better.
Means test the rich old buggers and remove all tax on kiwisaver contributions up to a certain contribution level.
This incentives the young to save so they can subsequently save the government from needing to fund them for 30 years at the end of their lives.
We need to get with the times. The state of our super scheme and the resulting need to have a universal pension are an international embarrassment.
Have you seen how incredibly intrusive work and income are when you are on any form of social benefit?
Have you seen their running costs?
This is just another welfare payout (primarily for people that don't need it). What's good for the goose is good for the gander.
Australians don't get taxed on their super lump sum payout. They spend it whichever way they choose. If people are still earning normal income past 65 of course they should be taxed. But people meeting either of the above descriptions shouldn't be getting a welfare payment (aka universal super), unless they blow all their super and meet the means criteria for needing said welfare payment.
Re superannuation and having high other income.
1. Keeping superannuation as a universal payment is administratively way simpler, and way less intrusive than a means test system.
2. We already have, in effect, more progressive income tax for some earners - the 12.5% extra for student loans. This works within our income tax system by simply having specific tax codes.
3. So just introduce more progressive income tax for all on superannuation, for those with higher other income. The system for administering this is all set up and well understood, it just needs specific income tax codes. No need to introduce basic income concepts.
4. We should have more progressive income tax, a reduction in the regressive goods and services tax, a capital gains tax and a wealth tax anyway.
Here's a novel concept! Instead of looking at ways to increase taxes, how about taking a sledge hammer to the always increasing and never ending billions of wastage of collected tax by successive governments. To name a few, never ending treaty settlements, gold plated super for politicians, brain dead "consultants", never ending "consultation" and studies that end up in the bin! The list is long!!
The higher earners already pay more tax. Promising no pension will just drive more tax avoidance.
The biggest issue in the last twenty years has been property speculators rinsing their income tax with property debt. That is now being phased out from October. Property speculator fueled prices is crushing the middle class, and sucking up any increases in benefits for the poor which is why WFF is consider a Landlord benefit, not a family one.. Less middle class, less tax and more welfare is a sad result of that. The only real winner is a much larger debt overhang in favor of the banking sector.
Susan St John has a Robin Hood complex. Nothing useful or original comes. Just tinkering.
There are better, more long term ways.
*Why tax superation savings at all. ie Kiwisaver. At entry or paying out.
* Ditch National Super and replace with Kiwisaver. (Would take 40 year phase-in) and universal membership and bigger contributions.
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