The Week in Tax: Inland Revenue targets the construction industry; the unfair tax treatment of ACC lump sum payments; and the latest OECD data on carbon pricing

This week, Inland Revenue launches a construction industry education campaign, an odd case highlights the continuing unfair tax treatment of lump sum payments, the OECD data around the use of taxes on carbon.

On Tuesday, Inland Revenue launched an education campaign for the construction industry. As its press release to tax agents indicated, “The purpose of the campaign is to engage with those in the construction industry, to ensure they're getting it right from the start and support them in understanding their tax obligations if they undertake cash transactions.”

The release goes on “Our customer research indicates that people are more likely to engage in hidden economy activity e.g., cash jobs, in an environment of economic uncertainty such as the current Covid-19 environment. We want to reduce the risk of this through awareness, education and compliance.”

And what it proposes to do is place Inland Revenue ads around building sites and hardware stores, together with online ads. Now, as part of this, Inland Revenue has put together a website called Rebuild NZ, and it's to highlight to those in the construction industry how they can ensure they meet their tax obligations as well as doing their bit to help rebuild New Zealand.

Now, this is a useful initiative from Inland Revenue. They do these campaigns regularly. This one actually is quite interesting in that it is tackling the question of cash, jobs and cashies, but it's not too heavy handed in its approach. Its website’s heading is “Cashies won't rebuild our country”. So it's playing on emotional strings. And this is actually quite standard practice now. You notice a play on what's the consequences of not contributing to the tax take. The website declares every “undeclared cash job hurts our economy and the greater New Zealand.” So it's really pulling the emotional triggers.

A couple of things of note on that. The website wisely, in my view, points out it's OK to do cashies. You just need to declare them on your annual tax return. What Inland Revenue is saying is that per se, these aren't illegal, but they become problematic if you don't declare the revenue from them.

There will be some persons who, for whatever reason, want to be paid cash. And you can draw your own conclusions as to why they might want that. But if they are following the rules, make the necessary declarations then Inland Revenue is unconcerned, relatively speaking.

The other thing the website highlights here is, and I quote, “Can cash jobs really be tracked”? And it underlines this absolutely, giving the following example.

If two tradies work together, one declares a job, the other doesn't. They can be dobbed in without realising it. If we audit one person, it might indicate another business or contractor that needs to be audited. Also, there's always a chance of a random audit. We can see when tradies buy supplies such as paint, carpet or timber without a corresponding declared job. We can also access information held by other government departments, banks, loyalty cards, casinos and many other organisations to make sure all income is being declared.

Interesting reference to casinos in there, because clearly casinos are a place where cash is handy for gambling. And if you've read many tax cases down the years you’ll know an excuse for unexplained income is often, “Oh, I got lucky on the horses or down at a casino.”

So what they're saying is it's never too late to do the right thing, come forward, make voluntary disclosures, or if you wish, report tax or tax evasion or tax fraud anonymously.

As I said, we've seen a number of these campaigns before.  As Inland Revenue works through the final part of its Business Transformation programme and gets fully back up to speed we'll see more and more resources deployed into taxing the hidden economy. The estimate is that it could be worth a billion dollars a year in undeclared GST and income tax.

ACC lump sum tax unfairness

Moving on. A case before the Taxation Review Authority, the tax equivalent of the District Court, caught my eye the other day. A taxpayer had commenced challenge proceedings against the Commissioner of Inland Revenue contesting the tax treatment of a lump sum paid to her by ACC on 9th November 2017. The payment was for weekly compensation due to her for the period from the date of her injury on 22nd April 2014 to 17th September 2017.

The taxpayer contended that the payment should have been treated for tax purposes as having been derived on an accruals basis and spread over the income years to which the payment related, rather than on a cash basis as assessed by the Commissioner.

As you can see, although she received over three years compensation in one sum, Inland Revenue treated it as income for the one year, even though it actually related to nearly three years, and taxed it at the relevant rate. And because of the way the tax system applied, a large chunk of that lump sum would have been taxed at 33%, when in fact probably it would have been taxed at lower rates had it been received when it should have been.

It's not the first time I've seen this. It's actually something I have raised directly with then Minister of Revenue Peter Dunne almost 10 years ago. It's a well-known problem of the tax system, that whenever ACC denies a claim or is slow paying out, often the recipients lose out on the tax side of it, because when they finally get the correct amount of compensation, it's paid as a lump sum and taxed accordingly.

The taxpayer in this case understandably outraged, then tried to take a case through the Taxation Review Authority. And in response, Inland Revenue - the Commissioner -  applied for an order striking it out as there was no cause of action as it was clearly untenable and could not succeed. And the TRA agreed there was no tenable prospect of success.

But that doesn't get past the issue that the taxpayer had a very fair point, and it's something, as I said, I've seen before. And it is frustrating that this continues to happen, and Inland Revenue and  successive Ministers of Revenue are inclined to do nothing about it.

In the interests of equity and fairness, this is an issue that should be addressed. By the way, the lump sum taxation of redundancy payments should also be addressed for the same reasons: a taxpayer may normally have their earnings taxed at 17.5%, but instead, when a lump sum, the tax system will tax it at 33%. And now with an increase in the tax rate to 39%, there is a likelihood that an even higher rate of tax - more than double in fact - could apply to a lump sum payment.

So addressing this is well overdue in my mind. But it's funny, there's a lot of stuff goes on in the tax world. But basic stuff like this which affects ordinary people, seems to just get left on the “Can't be bothered” or “Too hard” piles.

Tax threshholds

And interestingly, yesterday an article came out in Stuff, which ties into this.  It pointed out how tax rates for those middle-income earners are too high relative to their income because the thresholds have not been adjusted since April 2008.

As Geof Nightingale of PWC and the Tax Working Group pointed out, most attention needs to be paid to the tax rate applicable to middle income earner:

“I think our harshest tax rate isn't at 39% or 33%. It's 30%, which cuts in at 48,000 dollars. That's below the median wage. That jump from 17.5% to 30% in the dollar is a steep one. It seems tough to be hit with that tax rate when you're earning below the median income”.

I agreed with that, as did Robyn Walker, a partner at Deloitte.

And we also gave examples that if thresholds had been raised in line with wage inflation, the threshold at which 33% kicks in, which is currently $70,000, would probably be nearer to $100,000. And the $48,000-dollar threshold, when it rises to  30%, would be about $67,000.

So the thresholds are now well out of whack. But again, governments of both hues seem inclined to not do much about it or, kick it down the road and pretend when they do something, it's a tax cut. Something I think they've been allowed to get away with for too long.

And that's why Simon Bridges has put in this private member's bill to change that. It will be interesting to see what exactly happens to it. You can bet that politics will come into play and what is actually quite a sensible measure will probably be stifled.

Taxes on carbon

And finally, yesterday, 22nd April was Earth Day. And obviously there were a number of events in recognition of that event.  As part of the run up to Earth Day, the OECD released a brochure talking about effective carbon tax rates and how the 44 OECD and G20 countries price carbon emissions from energy use.

The OECD points out that carbon pricing is an effective decarbonisation policy because it makes low and zero carbon energy more competitive compared to high carbon alternatives by pricing carbon emissions properly. And it highlights what’s happened in the UK’s electricity sector, which used to be primarily coal and gas fired. The UK has increased effective carbon rates in that sector from seven euros per tonne of CO2 to more than 36 euros per tonne between 2012 and 2018. As a result, emissions in the electricity sector fell by 73% over that time.

And so what the OECD is saying is we should be looking at emission permit prices, carbon tax, or as we do here, an emissions trading scheme and fuel excise taxes. Fuel excise taxes always come with a caveat in that they are very regressive for low-income earners. One of the biggest problems we have with our transport policy here is the fuel taxes will hit low-income earners quite hard, particularly when we haven't yet developed sufficient alternatives in public transport to enable alternatives

The OECD report wasn't particularly complimentary about how the top 44 countries have been doing. It notes that three countries, Switzerland, Luxembourg and Norway, have reached a carbon pricing score rated on 60 euros per ton, which is the price expected by 2030 to be needed for carbon decarbonisation. Those three countries are close to 70% on that. And that's mainly because of fuel taxes on the road sector.

But elsewhere, progress is patchy. Brazil and India are right down at one end of the scale. The USA is at 22%. New Zealand sits roughly just below the average at 33%.

There's a lot of work to do and as we know, we're now starting to get into the debate led by the Climate Change Commission as to how we deal with this matter. Tax is going to play a part in that.

As I said, fuel taxes are a problem for until we develop adequate alternative transport policies, public transport. Building more roads doesn't help because that actually increases emissions. But the infrastructure deficit New Zealand has needs to be addressed and, tax will play a part in this.

As I've mentioned before, I think fringe benefit tax on high emission vehicles, as they do in the UK and Ireland, is something that we should be looking at. But I also feel very strongly that any taxes raised by this should be recycled back into ameliorating the impact for those who cannot choose alternatives to using their car.

Well, that's it for today. Next week, I'll be joined by John Cantin, a tax partner at KPMG who made some very interesting observing about the tax policy process and implications of the recent property tax proposals. We'll be discussing this and the implications for the Generic Tax Policy Process.

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 send me your feedback and tell your friends and clients. Until next week Ka kite āno!.