Terry Baucher looks at how tax authorities are honing in on the FBT net, the consequences of digital services taxes, taxing cryptos, and thinking about taxing activities in space

This week, should we follow the U.K.'s lead and change the way we calculate Fringe Benefit Tax (FBT) on cars? Is a tax war about to break out over France's digital services tax? And remember Bitcoin? Inland Revenue hasn't forgotten.

Last week, the government released its proposals for pricing emissions on new and imported vehicles. This prompted recent guest and fellow Taxpert Andrea Black to write an excellent blog post on the scheme, and in particular, the currently very generous FBT treatment of car parks, pretty much exempt, as opposed to public transport, subject to FBT.

This was something the tax working group actually recommended that the current FBT treatment be changed to encourage public transport. That was actually part of its environmental recommendations that were made.

There is a big discrepancy as the group noted, between how we treat vehicles for FBT, and how we treat public transport. And if we want to, as part of the moving to a lower-emission economy, we really want to be encouraging greater use of public transport, more efficient vehicles, and more fuel-efficient vehicles, in particular. That's where the government's so-called feebate scheme for imported vehicles comes into play. But what Andrea pointed out, and it's something that's been noted for some time, one of those popular vehicles on the road currently are the twin cab utes. Ford Rangers are apparently New Zealand's biggest selling new car.

And these are not fuel-efficient vehicles, although newer models are obviously more fuel-efficient than the older models. But there's also something of a bit of a myth that's developed around these vehicles, that as twin cab utes, so long as they have proper signage on/around them, they are, can be treated as work-related vehicles and exempt from FBT.

Now, FBT is one of those taxes which is highly compliance-intensive, and is pretty much for that reason, loathed by businesses, particularly small businesses. Because it does imply, it does, the compliance burden for FBT and it's the exemptions et cetera around it are pretty intensive. But it also appears to be that there's a lack of proper compliance in this area.

The twin cab ute undoubtedly is the tradies' vehicle. Very useful vehicle carrying the tools around. They've got the lockable rear tray making it a valuable utility vehicle. And there's no doubt that they qualify as work-related vehicles for many tradies. But the observation is, that not every twin cab ute that you see on the road looks like or has got the proper signage and would actually meet the definition of a work-related vehicle. And Andrea touches on this in the old rules and how it was previously that a twin cab ute originally would not have qualified, because it could carry passengers. That was the idea. There was a rear tray and just the driver and passenger, and that was it. But the twin cab ute was allowed into the exemption.

Now, there's a little bit of discussion around what we could do in this space and Inland Revenue, I have heard, is considering having another look at what's going on with the use of twin cab utes as work-related vehicles. The amount of FBT that's paid in this space seems to be, minimal maybe not the right word, but should we say, it's poorly-complied with. And you may recall, I talked about how Minister of Revenue Minister Stuart Nash was greeted at a tax conference by someone who said, "Welcome to the South Island, where we don't pay FBT on company vehicles." Not a very smart move, as I said at the time, and I think that will come back to bite them.

But, picking up the environmental issue, over in the U.K., FBT applies to company cars. There is a scale that's worked out. But here's the clever thing, and something I believe we should be looking at, is that the amount of FBT, the fringe benefit value is reduced, depending on the car's efficiency, fuel efficiency. So, if it's a lower emission vehicle, you pay less FBT. So, there you have FBT tax being used as a tool to encourage better behaviour. It's something I think we, if we are going to look at FBT, and it is something that keeps coming up regularly, then this would be a good starting point.

Now, because it's a fairly simple process, we know we want to encourage fuel emission, better fuel emissions, fuel efficiency, and transport represents a large portion of our emissions. And whether or not you believe in climate change or not, the rest of the world is following on this and we are going to have to move with that and accept reducing emissions is something we are going to have to do, on health grounds more than anything else. From my office here in Auckland, I can look across the Waitemata Harbour and I can see, on still days, a smog line sitting across the Harbour.

We don't see it every day because the winds come through and clear it away, but it's there. That is not something we want to see, and one of the things we are going to have to do to get that, clear that away. Reducing emissions will improve on health grounds and pollution grounds is something we should be encouraging. And we are one of only three countries, one of the others is Australia, do not have vehicle emissions standards. So something, if the rest of the world is following that path, there are opportunities there for us to score in my view, fairly easy runs on lowering carbon emissions.

Taxing packaging

There is other stuff that's going on from the U.K. because the U.K. has actually been really quite busy. When you think of the U.K. right now, you think of extremely lucky Cricket World Cup wins, and also Brexit, which just seems to be one ongoing shambles after another. But Britain has been working very assiduously to reduce its emissions, greenhouse gases, and it's been promoting a number of measures on the way, such as the FBT measure I just mentioned.

Another one they've got coming up is one to tax plastic packaging. This is something they put out proposals for a plastic packaging tax to be introduced in April, 2022. And they have a waste disposal levies which both that, plastic packaging and the waste disposal levy, are designed, are behaviour,ral taxes. And they're actually designed not as revenue-raisers, but to encourage better behaviour. Because as people start wasting less and dumping less, there was a waste landfill tax basically and reduced the use of plastic. These, the revenue from that will diminish. So there's a win-win there for the government, it's completely neutral. Ultimately it's just simply designed to encourage better behaviour. We ought to be looking at all of that, in my view. So watch this space to see what's happening.

Taxing digital services

Now, we've talked about digital services tax in the past, and the government recently released a discussion document, talking about how to tax the digital services industry and it sought feedback on whether a digital services tax or DST might work in practice. Submissions on that closed yesterday.

In the meantime, there's a bit of an unexpected development that happened in Europe in the last month, when the French Senate passed a DST into law. And what that has moved, a couple of things have happened as a result of that. That seems to have encouraged the British to move forward with their own DST.

But more importantly, it has prompted the Americans to, through the office of the United States Trade Representative to initiate what they call a Section 301 investigation. And this is under the U.S. Trade Act 1974.

It empowers the Office of the United States Trade Representative to initiate an investigation into France's digital services tax and bring about a public hearing. So, it's a retaliatory measure.

Now one of the things, this is something that in feedback and talking to other professionals about DSTs, this is the concern that they have about New Zealand going down a unilateral route.

That is, that America can retaliate. Other countries could retaliate on this measure. And New Zealand exporters will suddenly find themselves hit with this particular levy. And since we are trying to develop a weightless economy as they call it, that is not good news. And so, the mood amongst the tax professionals in this space, who are dealing with international tax, is to proceed extremely carefully around it, to be a follower around DST. See how this plays out.

The thing is though, this is a very political field. I think the digital giants, the Facebooks, the Googles, et cetera, have probably overplayed their hand and there's a certain amount of exasperation developing amongst around the world at their aggressive tax practices, their monopolistic behaviour. And so, a DST is a means of hitting back at them, grabbing some revenue and getting some very big brownie points from the voting public. Which is extremely important, because politicians are there, they've got jobs, they want to be re-elected, and hitting multi-nationals is always, always a reasonably popular move.

So there's precautions being recommended around this, but the politics are driving towards taking action. And what I think the New Zealand government will need, should do, really, is sit back and see how things are playing out. But this space is moving very quickly. The whole plan behind the DSTs, is to force the, or speed up the rate of change from the OECD, which is looking at this whole question. But governments are now apparently saying that they can't wait until 2025 before the OECD works through all this process.

So there's a big battle brewing between the lobbyists in America for Facebook, Google, and the tech giants, and overseas governments who will be saying, we want our cut. And New Zealand as a small player would probably get caught in the middle there, and it could have unfortunate consequences for digital exporters. The other thing that has been pointed out, that between $50 to $80 million dollars, the New Zealand DST isn't actually a significant fundraiser, revenue raiser. That amount of revenue could, for example, possibly be lying around to be collected from more assiduous FBT investigations by Inland Revenue.

Taxing cryptocurrencies

Moving on, in the past, one of the things, the side effects of the tax working groups and the government's decision not to introduce a general capital gains tax, is, it has left the treatment of transactions in a bit of limbo. And in particular, the question I'm coming up with is the treatment of cryptocurrency.

Bitcoin has been all over the place. Recently it was back just floating around $10,000 U.S. dollars a coin. And at the moment Facebook was having hearings before the U.S. Congress about its proposed cryptocurrency. So, these tools are still here. There's a lot of sceptics around cryptocurrency, but there are equally a lot of believers in that. And, but the point is, that the income tax treatment for cryptocurrency here is a little grey and although Inland Revenue issued a ruling back in April, I think, sorry, it has issued a ruling on the matter and broadly speaking it is saying, it's basically treating it as taxable disposals of cryptocurrency as taxable in all, practically all circumstances.

There's still a bit of a grey area around that. And that's one of the unfortunate things about when you don't set out broad rules under a capital gains tax as would have been, what would have happened, you are left with this grey area. But that doesn't mean Inland Revenue hasn't been paying attention to the matter. It has been issuing a number of rulings on the matter and consultations. And one of the latest ones, it has just been, is to go out is to, talking about how employee share schemes relate to employer-issued crypto-assets passed on, to an employee. And there's consultation on that, are going on until the 6th of August. So, Inland Revenue's been in this space and it believes it is basically, in that particular case, crypto-assets provided to an employee would be taxable. And the value of the benefit would be, the taxable amount would be the value of the cryptoasset at the time that passed.

So this is one of those areas you just could keep watching this space. Broadly speaking, if Inland Revenue says cryptocurrencies are going to be taxable on the gains, that means the losses are deductible. And I suspect that just a few people might be nursing big losses on Bitcoin over the past 12 to 18 months. We’ll see whether those will start appearing as people make the claims in their income tax returns.

Taxing outer space

And finally, it is the 50th anniversary of the Apollo 11 landing on the moon. And it's worth thinking, just remembering on this point, how much space travel is back in the news. You've got the likes of Jeff Bezos and Elon Musk promoting travel to the moon, travel to Mars, et cetera. But what's interesting in this, the tax context here, is that jurisdictions are actually starting to think about the commercial application of space. And for example, California has now decided, or is that it's proposing to charge for rockets that pass over, that launched and pass over California airspace. So, where there's, so the thing is, we may not be going to the moon, but tax is going to reach out into space anyway.

This article is a transcript of the July 19 edition of The Week In Tax, a podcast by Terry Baucher. This transcript is here with permission. You can also listen below.