By Terry Baucher*
Politicians Metiria Turei, Bill English and Winston Peters inadvertently provide a text book study on the distinctions between, and the consequences of, making a simple mistake, getting involved in a tax avoidance scheme and tax evasion.
In late August Peters confirmed that he had been over paid New Zealand superannuation since he first began receiving it in 2010.
The Ministry of Social Development did not identify the error until July this year when it wrote and advised Peters of the mistake. He immediately repaid the over paid superannuation and there the matter should have rested except someone leaked it to the media, prompting Peters’ public admission. Other than the subsequent leaking of the over payment, Peters’ mistake was similar to the many errors Inland Revenue identifies every year. These are usually quickly corrected with the under, or sometimes, over paid tax repaid subject to interest.
Bill English passed it off as a mistake at the time, but when he over claimed $32,000 in ministerial accommodation allowances in 2009, his situation had many of the characteristics seen in tax avoidance cases.
His ability to claim an additional allowance depended on whether he met the definition of not having a pecuniary interest in the Wellington property owned by a discretionary trust. He sought advice before claiming the additional allowance, but the advice was subsequently ruled too narrow in its interpretation.
Tax avoidance cases turn on crucial definitions and often involve entities such as trusts and limited partnerships. As in English’s case, advice is usually sought before the transaction proceeds, only for the advice to later get overturned following an Inland Revenue investigation. The consequences are usually that the tax “avoided” becomes payable together with use of money interest. Depending on the complexity and seriousness of the transaction, shortfall penalties of up to 100% of the tax avoided can be imposed. Generally, though those caught pay up and move on. Which is what English did; repaying the over claimed amount and moving on to become Prime Minister in December last year.
Metiria Turei’s dramatic admission that during the 1990s she had lied to Work and Income about the number of flatmates she had in order to preserve her benefits represented welfare fraud. If she was also receiving rental income from her flatmates and did not include this in a tax return, it also constituted tax evasion. (It may not, because under Inland Revenue practice in the 1990s, a person was only required to declare rental income if he or she was receiving payments from more than one flatmate).
Unsurprisingly, tax evasion carries the heaviest penalty with shortfall penalties of up to 150% of the tax evaded. Inland Revenue will prosecute more extreme cases, in the year ended 30th June 2017 it completed 114 prosecutions for tax evasion, knowledge and Crimes Act 1961 offences.
The number of Inland Revenue prosecutions pales in relation to those undertaken by the Ministry of Social Development. According to the Ministry’s 2016-17 annual report it investigated 5,992 cases during the year, identifying 2,307 over payments. It also completed 453 prosecutions, almost four times as many as Inland Revenue. The number of completed prosecutions represented an eye-watering 96.2% success rate, just above the Ministry’s benchmark of 95%. However, the Ministry’s 2016-17 report contains no clear details about how much welfare fraud costs, although it appears that the total amount of over paid benefits during the year was about $230 million.
By contrast, in the same year Inland Revenue identified $1.3 billion of tax differences, or more than five times the value of over paid benefits. Some $462 million of these tax differences was the result of investigations into aggressive tax planning with another $159 million representing deliberate underpayments or evasion. Despite these impressive figures the amount of deliberately underpaid tax could be just a small part of the total being evaded: the World Bank estimates the annual value of New Zealand’s hidden economy could be as much as $20 billion.
The public reaction to Metiria Turei’s revelation reflected a widespread attitude that benefit fraud is unacceptable no matter the circumstances. However, 51% of Kiwis surveyed this year thought cash jobs, the classic example of tax evasion, were acceptable, even though in the same survey 90% said paying tax is the right thing to do. This points to a rather more ambivalent attitude towards the nature of tax evasion than its scale and severity would suggest.
In 2016-17 Inland Revenue closed 1132 investigations involving non-disclosed income. On average those detected paid up an additional $140,000 in tax, interest and penalties. During the 2014-15 year, the last for which details are available, the Ministry of Social Development completed 927 prosecutions for benefit fraud and the average value of fraud over payments was $33,519. As Professor Lisa Marriott noted welfare fraudsters are three times more likely to be jailed than tax evaders even though tax evasion is both far more prevalent and involves significantly greater sums.
Ultimately, Metiria Turei was undone by this disparity between public perceptions of “massive” benefit fraud and the actual amounts involved. If the end of her political career seems a harsh punishment for relatively low-level offending, then that mirrors what happens with beneficiaries generally. Ironically, that was one of the points she was trying to make.
*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »
31 Comments
"a person was only required to declare rental income if he or she was receiving payments from more than one flatmate"
Personally, I disagree with that. ALL persons paying rent should have that amount included in the taxable income of the 'landlord', but I accept that the administration of setting up partial claims etc on a rented house may be 'about' one person's worth - quid pro quo. Regardless, I'll bet there are many ( + hundreds? thousands?) that are being paid - in cash - for a room(s) in their house as lodgings that are no declaring it. That's why all properties should be liable for tax on the Implied Rental Return of their properties.
Give me a break Baucher. Two of the punters here never sought advice and took the money. One champion of the elderly pretends he doesn’t even know the current pension rates. One punter made stuff up and is a crook.
One punter did take advice and acted on that advice. That advice turned out to be wrong. One punter should have been in Vogel House anyway if the Governor General hadn’t been squatting in it while they were have a do up done on the GG pad.
“However, Auditor-General Lyn Provost did not find fault with Mr English in an eight-page report, saying he acted on advice.”
Most ordinary people actually read up on their entitlements and duties prior to applying or undertaking something. These aren't ordinary people, they are elected officials. The government normally doesn't hand out money unless the information you provide them suggests you're entitled to it.
English did nothing wrong in investing his superannuation in a building and renting it to parliamentary services. The Greens were the ones who pioneered this form of investment, copied by many in Parliament. Meteria is as out and out law-breaking fraud, claiming money she shouldn't have, with Malice aforethought over many years to support her recreations. Peter's 'guilty mind' is unproven, though he was out of parliament when he first signed up for single pension, even though he had a partner at the time.
Bill, and all of them, is entitled to a Parliamentary Superannuation scheme that most New Zealanders would envy. He doesn't need 'investment property' ( neither did Helen Clark with her 8 ) to provide for his future. We, the New Zealand public, have been sold a pup with the "Buy an Investment Property (s) for your retirement savings!' It's fraught with disaster at three times (1) When buying it ( was is it; where is it etc) (2) whilst it's held ( who knows what the market and personal conditions will be at any time during the +30 years to retirement) and (3) what will it be worth come cash-in time (who will buy it, and for how much?)
The sad reality is .....we bought the story - literally!
Vogel House is, as I understand it, the PMs residence while in Wellington. I think BE was the Deputy PM at the time of the indiscretion, and it was Key I believe who told him to pay back not just what was unlawfully claimed in terms of the timing of the adjustment (i.e., to make the claim lawful), but also to pay back the full balance paid to him after he had made the necessary trust adjustment, and to stop claiming altogether.
I think the point Key made to him was that he and his family had all been Wellington residents for years (i.e., wife also working in Wellington; kids going to school there).
Premier House is the PM's residence in Wellington. Bill, being a minister and Deputy PM, was entitled to a ministerial residence. Bill should have stuck to his guns.
"The conservation of Premier House, as they renamed it, was a 1990 Sesquicentennial project. That year Geoffrey Palmer and his wife, Margaret, became its first official residents.
Premier House has housed every subsequent prime minister.
Vogel House remains a ministerial house. In 2008 the governor-general moved into ‘Government House Vogel’ for four years while Government House Wellington was restored."
“However, Auditor-General Lyn Provost did not find fault with Mr English in an eight-page report, saying he acted on advice.”
you can not do that
If you live in the property
You can't claim for expenses that relate to your personal living costs. For example, if you move into your rental property after not being able to find tenants.
If you're living in a family home that was bought or transferred to a company, partnership, or trust which you own or control, you need to be very careful about claiming expenses. If in effect you're renting the property to yourself, we could view these claims as tax avoidance and you could face penalties, even prosecution.
"you can not do that". Show me where any law forbids it?
Plenty of bluff, as the law is inadequate. You own 2 or so rentals via a coy. A tenant moves out, you move in. No tax is avoided.....shhhhhhh.
You rent from the Family Trust. Claim wff accommodation. What law is that breaching?
Morality, ethics and law do not correlate 100%. The disgust at Bill English's actions was due to his acts being unethical despite the fact he was successfully circumventing the intent and spirit of the law. As is Simon Bridges with his putting the house in a private superannuation scheme to get around the fact property in personal trusts has now been shut down.
It's still asking the taxpayer to hand over money to you to pay the rent on a house you yourself own. It's double dipping, and its not a practice that was condoned.
The velocity of money is still slowing, which means that businesses have to do everything they can to hold down costs, and one of those things is to rein in wages. Real US wage growth for the year ending November 2015 was 2.8%, while for the year ending November 2016 it was just 1%. The savings rate is now the lowest in 10 years. Yet the Federal Reserve has a fetish for this thing called the Phillips curve, a theory that was thoroughly debunked by Milton Friedman early on and later by numerous other economists as having no empirical link to reality. But since the Fed has no other model, they cling desperately to it, like a drowning man to a bit of driftwood.The near future is not going to look like the near or the distant past. The Fed. waited too long to end quantitative easing and begin normalizing interest rates. Their delay created our present weird situation where we have little or no inflation, but the cost of living for people at the median income level and below is outpacing wage growth and leaving the average household struggling to stay even. Real wages, that wage after CPI growth, have advanced only 0.2% a year since 1973. Diminished earning power has, in turn, robbed businesses of pricing power and forced them to cut costs ruthlessly. One way you slash costs is by automating. The Fed thinks QE helped to bring about the rising asset prices (stocks, bonds, and housing – assets of all types). Yet somehow they believe that quantitative tightening (QT) won’t have any effect on the markets. If we have 20 million workers who presumably want to have jobs but suddenly find themselves without job opportunities because of automation and other forces, that is not an environment in which we are going to see wage inflation. That is a situation in which workers will take whatever wages they can get. Think Greece.
http://ggc-mauldin-images.s3.amazonaws.com/uploads/pdf/171209_TFTF.pdf
"As Marx explained, every enterprise is driven to pursue the same strategy, and the end result is massive over-investment and overcapacity. The flood of products overwhelms demand, and prices fall. This leads to a counter-intuitive result: over-investment destroys capital. The naïve faith that robots will generate so much wealth that humans will have no work has it backward: over-investment will destroy capital, not create it. Once an enterprise is competing only with other automated enterprises, profits fall to near-zero as lower cost competitors emerge."
(CH Smith)
Full Marx..
https://www.google.co.nz/search?q=bent+meaning&ie=utf-8&oe=utf-8&client…
Take yer pick. We certainly have come to a bend in the road, Some of us are warped. some of us...well read it for yourself...or avoid it ...as ye want.......Some can get away with anything. But a dictionary, has the final word.
Plain English. No avoiding the twists and turns these days. All in print....Different perspectives. View it how ye please,
Some can put a different view, twist it how they like. Should know better. Especially when leading the pack. Terms change, But principle is the same.
Learn to read. you may view it alternatively, I say. Do not put words in my mouth. It is all there in Black and White. Any lawyer or former pupil would know the difference.
Taint rocket science.
This is a world of phone ethics, the sound has the meaning, not the spelling.
Personally I believe farmers are the ultimate causes of social disfunction and we should tax inputs to farms at a special rate of 33%
As justification consider this
https://www.theguardian.com/science/2017/dec/10/super-rich-elites-inequ…
Have a happy week...
Our hidden economy....is obvious to me.
Gainfully employed in producing..Nowt....at vast cost to our "Economy'
Led by takers, with half baked ideas. So it keeps on rising...forever in your debt.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11956696
What is the intent of the law?
Answer: to avoid politicians taking more money from the taxpayer to rent out a property when they don't need to, because they already have a house to stay in.
What did Bill English do? Altered the ownership structure so he could pretend the house wasn't his, and filch more taxpayer money as a result.
I'm surprised so many seem to think this is a moral act. Apparently letter of the law is everything to some people, and you should look to extract as much out of NZ taxpayers as possible. (Disclaimer: does not apply to poor people, who are obviously just lazy bludgers.)
What part of 'sought independent professional advice' is not being understood ?
That's exactly what I do in respect of business and investments interests on a regular basis i.e., ask an expert to ensure what I am proposing to do complies with the law. Not because I think it's dodgy but to make sure I'm doing things right.
You might believe his actions don't conform to some construed moral code but to allege he was acting illegally and stealing, as you do with your 'filching' comment, is defamatory nonsense. For 'stealing' insert Turei.
What part of my question re the intent of the law was too hard to answer?
So, "Can I get around it this way?" and "Yes, looks like you can" is fine and ethical eh, even when it's clearly opposed to the intent of the law. Why else would they shut it down if not for the fact the law intends to preclude this?
Intent alone is a very poor defence indeed.
Neville Chamberlain intended to establish 'Peace in our time', but in the end there was a failure of competence.
Also, you are treating law and morality as if one is a perfect mirror reflection of the other, which is not the case. Any cursory read of history can uncover many example where the law was immoral.
My comment further up noted that law and morality are different things. It's pretty clear people were outraged at Bill's apparent lack of morality in successfully circumventing the law to extract more money from taxpayers.
It shouldn't be too much to ask, for politicians to act ethically and honourably. Whether in working around the law to extract more money from taxpayers, or lying to taxpayers about an MP's conduct and your knowledge of it.
Serious question - IF the law is not an absolute standard for morality AND the law is by nature legalistic WHO becomes the judge of either;
(a) what the law makers 'intention' was, or
(b) whether an action is 'ethical' if it is not in fact illegal?
If you say words to the effect that it is the common opinion of the day then I might conclude that so long as the majority of Cambodian citizens of the time agreed with the killing fields that it was morally okay. Not saying you will, just putting my cards on the tale that I think morality through majority does not hold up very well in history.
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