Terry Baucher updates us on why the IRD interest rates have changed, the cost of compliance for small businesses, and the Productivity Commission on local government finance which may affect taxes a lot

This week, the official cash rate goes down but Inland Revenue interest rates rise, the cost of compliance for small businesses and the Productivity Commission on local government finance.

This week the use of money interest rates payable on underpayments and overpayments of tax were increased with effect from 29th of August, 2019. Now you may recall that on the 8th of May this year the official cash rate was lowered by 25 basis points to 1.5%. So, the Revenue's decision to increase tax, the use of money interest on underpaid tax from 8.22% to 8.35% has caught everyone by surprise.  And just to rub the matters in, the rate of interest for overpayments of tax will decrease from 1.02% to 0.81%, a 7.54% percentage point differential. That's the largest on record since 2009 when the respective rates were 14.24% for underpaid tax and the sign of the devil, 6.66% for overpaid tax.

Now in 2009 Inland Revenue changed the way its approach to use of money interest rates. The rates are reviewed regularly so they’re supposed to keep them in line with market interest rates and the last review happened in March 2017. What the Revenue is saying is that the new rates are consistent with floating first rate mortgages and the 90-day bank bill rate. And they then add 250 basis points for the mortgages and take off 100 basis points for the bank bill rate.

Now the thing is though, this is a bit of a real surprise coming in the wake of the OCR cut. And it transpires that these rates were reviewed in April, and they take a couple of months to process and they will take another couple of months to come into effect. At the end of next month, the 29th of August. By the way the reason they choose 29th of August is it's the day after the first provisional tax payment date for the current 2019 20-year happens. So that makes it nice and consistent as everyone knows that provisional tax date.

And by the way, if you're feeling outraged enough about the rate in underpaid tax, bear in mind that if you are late paying your tax, you're still subject to a late payment penalty. And that late payment penalty is an immediate 1%, and if it still hasn't been paid within seven days a further four percentage points are added on, so a total of 5% hits that week, and then 1% per month thereafter. And this is why myself and other tax agents regularly experience  time and time again, people fall into arrears very quickly with their tax and penalties and the penalties accelerate at a rapid rate and people just give up.

And here's the thing. In 2013 I saw a paper from Inland Revenue which compared the effectiveness of payments that were made on time in New Zealand with other jurisdictions. Other jurisdictions, like for example Australia does not have a late payment penalty but New Zealand did. There was no discernible difference, New Zealand taxpayers were not prompter in paying tax than any other taxpayers even though we've had the higher penalties. So in other words the late penalty regime doesn't work, Inland Revenue knows it doesn't work and yet are still persisting with it.

So that's certainly very frustrating that something is carrying on like ... because taxpayers, tax agents we spend a lot of time trying to sort out this mess, a lot is getting written off and basically its’ just a massive waste of time. And here also is something, the other matter is this increase in the use of money interest rates, and time when the official cash rate has come down and there are expectations that it would be reduced again is odd. It also speaks of a little bit of not paying attention to the optics, it's not a great look.

Inland Revenue's release said, we last looked at this March 2017, they're supposed to review regularly, and that's fine they should be doing that but once you've done that, if you started doing it in April and in the middle of that process the OCR gets cut, surely someone somewhere in Inland Revenue management would've said, "Hang on here. The OCR's just been cut and you're telling us we should be increasing the rates based on the rates that existed prior to that cut?" It doesn't make a lot of sense. And I would think that perhaps there's been a quiet please explain between the Inland Revenue minister and the Commissioner of Revenue, who knows?

But it leads on to another topic, about cost and compliance. And interestingly the Inland Revenue regularly looks at this and just has released a report on the cost and compliance for small businesses. What it's showing is that it's taken as a baseline since 2013 prior to when it started the business transformation program and obviously it's chosen that date so it can show that the business transformation program is having the effect of reducing compliance costs for businesses.

What it's saying is that since 2016 the amount of time that taxpayers are spending, meaning that the time taxpayers are spending on dealing with tax compliance has stayed the same, about 27 hours annually. In 2013 it was 36 hours, but costs have risen because of inflation, the internal costs of that. And that is because of basically the inflation and the use of external advisors and it is noted for example that the external cost of advisors has gone up from an estimated $1000 in 2016 to $1380 in 2018. By the way this survey was all over 6000 small businesses, so it's statistically very sound. It's actually probably one of the more comprehensive surveys around.

We know from my time on the Small Business Council that there's not a lot of work being done in this space called "micro businesses", those people under five employees, five or fewer employees, but here there's actually someone who is surveying that space. An interesting thing here, which I think all policymakers should be keeping in mind is that Inland Revenue the paper is saying, "Yep, things in Inland Revenue's getting easier but, we're having a lot more compliance from other matters”, Health and Safety was mentioned particularly and Local Government. So there are issues there still going on around compliance.

And the Revenue's grand business transformation plan is to make it easier for taxpayers to deal with Inland Revenue. But as I've said before and will keep saying until someone actually starts addressing this issue, the Business Transformation Program hasn't taken into account how tax agents work with Inland Revenue, how we use the system.

And a couple of things came up in this week with other tax agents which should be quite concerning. One is it's more difficult to transfer tax refunds between years. The Revenue system has been set up to basically clear credits, if there's a credit it gets cleared quickly. If you're dealing directly with a taxpayer that's fantastic and for people who want to do refunds etc., that's what they want to see. They want you to say, "Bank, my refund's due, bill be paid, great."

But with tax people with tax agents have more complicated matters. And sometimes they have linked entities and we will be doing other matters like shuffling money or refunds around. So, for example we might say, "Great There's a refund due here, we'll shuffle it off for the husband, we'll shuffle it across to the wife or to the company. For the company's refund we'll pass it out to the husband and wife shareholders."

At present the Revenue’s systems are making that more difficult. The other thing that they've started doing as well,  and it's a little bit more concerning is that they're making use of a provision in the Tax Administration Act to divert funds, refunds that may be due to meet a liability that is coming.

So for example someone may have an income tax refund, the taxpayer may have an income tax refund for the March 2019 year, but they've got the GST liability coming up for the 31st of July period. And what some tax agents are reporting this that they're seeing refunds being diverted and pushed across to meet that tax payable even though it's not actually due until the specific date, in the case of the GST period 31 July, it's due on the 28th of August.

So this is causing consternation and it can actually cause a bit of a hiccup. Taxpayers may be saying, "Well I've set up a payment to go through to meet that GST liability." And they're expecting the income tax refund to come in for more often than not the income tax refunds are going off to meet other costs and they got, somebody got hit, caught out of pocket.  This is a matter that Inland Revenue has been a bit slow to address and is probably only just now starting to come up on tax agents minds and processing that matter and how to respond to it.

So it's a bit of a frustrating thing that on one hand the Inland Revenue's efficiencies have gains for people, on the other hand, they actually are producing inefficiencies for other people. Interesting by the way, the Revenue do know that most of this business advisors, small businesses do have external advisors in this space.

One point they did notice though was barely 10% we're using some form of payroll service and I think that is something that people really ought to consider a lot more because of the pay day filing matter where you are expected to tell Inland Revenue the day by filing details of any pay you make on the day it is made, you don't necessarily have to pay, P-A-Y-E the same day, although larger organisations will be.

That is something that's caused a lot of consternation to small businesses but there are payroll services around, we use Smart Payroll which can help you with that.  This is something that The Tax Working Group was also keen to help suggest. One of its recommendations was perhaps to think about providing some form of subsidy for using software as a service and cloud-based accounting systems. 

Speaking of The Tax Working Group, it made recommendations to consider the taxation of vacant land and the government responded by asking the Productivity Commission to have a look at that particular matter.

Now the Productivity Commission has just released a draft report on local government and the financing of local government, a 306-page document.

Plenty to chew on in there and there's related papers as well including an interesting looking one from Oliver Shaw, that's the firm which includes Robin Oliver, ex-Deputy Commissioner of Inland Revenue and ex-member of The Tax Working Group, which looks at local government financing. Now this is a matter which basically may seem arcane but I think has big implications for small businesses, because you can recall earlier I was saying that small businesses were complaining about compliance and including local government compliance.

And in the matter here the Productivity Commission has talked about what funding sources are available to local government. And for example, 5% of total revenue put into the Productivity Commission comes from regulatory income. Rates provide about 47%, and then you got sales and user charges which bring from 13% of revenue.

So, the pressure on local government is ever growing as populations grow and what they feel they get dumped on by the central government.  And one of the things as I mentioned minutes ago, the government asked the Productivity Commission to look into the question of should we have a tax on vacant land? And the Productivity Commissioner's report actually rather kicks that down the road because it's invited for submissions on that particular topic.

So it's not made any specific recommendations and we'll see some final reports produced I think later this year. But it's common argument about taxation of vacant land that it does incentivize the productive use of land so it discourages land banking.

However, it sees issues the definition of vacant land and possibly that there's not much revenue in it. Which probably is a bit frustrating from the government's viewpoint because it wants to be seen to be doing something which anecdotally, if nothing else is causing consternation in the wider community and does it have an impact? Does land banking of vacant land have an impact on housing? Watch this space. In that space, and just picking up points I made last week, I expect to see more Inland Revenue activity, audit activity on enforcing the right land tax and other related tests for the taxation of land.

And finally, from the call-a-spade-a-bloody-shovel file, Australia is in the process of passing a number of tax bills which very definitely fall within that category. Two such bills include the Treasury Laws Amendment, making sure multi-nationals pay their fair share of tax in Australia and other measures bill, 2019, and my favourite, the Treasury Laws Amendment Tax Relief so Working Australians Keep More of Their Money bill 2019.  Both really say what's on the tube. And I was just thinking, if we followed the Aussie example, could we Keep The Multi-National Bastards Honest bill sometime?

This article is a transcript of the July 12 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission. You can also listen below.