Te wiki o te tāke; Terry Baucher has been exploring what more can be done for victims of the recent bad weather disasters, and thinking more broadly about the climate and demographic challenges ahead

The relief effort for the areas affected by Cyclone Gabrielle has picked up this past week. The government announcing a $50 million package for affected businesses, plus additional funding for the repairs of the roading network damaged by the cyclone.

Included in those reliefs is a temporary exemption from the Credit Contracts and Consumer Finance Act 2003 requirements, relaxing the requirements for banks to provide credit. This applies to the Gisborne, Hawke's Bay and Tararua regions and enables banks and other lenders to quickly provide up to $10,000 in credit to affected businesses and individuals.

In terms of specific tax reliefs, as we mentioned last week, Inland Revenue has the ability to remit late payment penalties and also use of money interest for late payments on tax payments. The exemption for use of money interest runs through until 30th June. And then there is the Income Equalisation scheme we mentioned last week. That's obviously going to be important for those eligible to use it, such as farmers and others with agricultural businesses on land. Just to reiterate, deposits for the March 2022 income year can now be made until 31st May, and withdrawals may also now be made on application.

Now, other things you can do if you want to help is making charitable donations to approved organisations. And there's also the opportunity for businesses to gift trading stock as well and not be taxed for disposing of it below market value. This is something I think supermarkets, restaurants and farmers are already making use of this provision which was introduced as part of the COVID 19 response. It was due to expire on 31st March but an order has now been issued to extend it until 31st March 2024. Now that will be fairly useful in the short term.

Just to repeat what a point I made last week, when you're dealing with Inland Revenue, the best approach is to get in contact early and let them know what's happening. Unfortunately, at the moment Inland Revenue’s offices in Napier and Gisborne are still closed. But if you're in the affected areas, your best option is to call Inland Revenue on their dedicated helpline 0800 473566. Or you send a message via myIR using the key word “flood”.

That's the main reliefs available although we don't quite know how the $50 million business relief is to be distributed just yet but at least some help is on the way. What other things could be done from a tax perspective? I got some insights into that from a colleague, Stephen Diedericks, a tax agent in Hawke's Bay. Based on the personal experiences of himself and other tax agents in the area he’s come back with some feedback on what's going on and what could be done.

As he said, the issues they face are really numerous. First and foremost, positive cash flow is drying up. Then there are the seasonal farm workers who may have had jobs cancelled or they're on the way here and have no accommodation to go to. I see there's some changes to visa requirements underway which may be useful. There's an enormous amount of damage to farm equipment and there are delays in obtaining new equipment. Even if you get a quick insurance pay out, getting replacement equipment may not be that easy. For example, Stephen mentions how one farmer placed an order this past week but will only receive delivery in 2024.

Then how do businesses support staff who've lost everything? Napier, as we know, was hit very hard. It so happened Cyclone Gabrielle coincided with Art Deco week, which is a big, big event for the region, and that's not happening. As Stephen notes, volunteers have come and helped out and maybe some form of payment could be made to them? In his words, “rural farms are under water, crops are damaged. It could be more than one season for the land to recover.” And an unsurprising knock-on effect from that is food and vegetable prices for city-dwellers are likely to increase.

In terms of suggestions. Stephen and his colleagues believe there should be a six-month moratorium on all purchases and personal debt for those who have lost everything. He suggests providing easy access to KiwiSaver which is perhaps controversial, but can be done in cases of hardship. This would appear to be one of those situations, I would think. Basically, the point keeps being repeated. Cash injections to help businesses trying to get back on their feet and help the staff who may have had their homes destroyed or severely damaged.

A very important point also is some form of certainty with rent. Stephen’s view was that some form of rent holiday is required. The response by landlords in the wake of the pandemic was, shall we say, a little bit uneven. Some landlords, including my own, by the way, were willing to accommodate tenants who were affected, others less so. But I agree putting a rent moratorium in place would be very useful.

Then there's the opportunity of reactivating the wage subsidy scheme. I know the Prime Minister has mentioned that this is a possibility. This is an off-the-shelf response we can embrace. My only caveat to using the wage subsidy is that, as we saw with the payments made during the COVID 19 response, some organisations took it who didn't need it and then didn't repay it. And then there were other organisations that took the payments but didn't pass them on to employees. Personally, I favour getting payments directly to employees and as quickly as possible.

Anyway, notwithstanding the criticisms of the scheme, it was set up incredibly quickly paying promptly and was absolutely vital in that crunch period in March and April 2020. It’s there and it's something we've done before, so we should be able to activate it again pretty easily.

Now in terms of specific tax responses, Stephen and his colleagues have a very good suggestion, which I totally endorse and that is to increase the low value asset value. This is where this is the amount below which you can immediately depreciate the full cost of an item. Stephen and his colleagues suggest raising the threshold temporarily from its current $1,000 limit to $20,000. If you recall, back in 2020 it was increased to $5,000 for 12 months, and that was a welcome move. It helps businesses get replacement equipment, and that's important at this stage.

Stephen is also supportive of the measures already taken by Inland Revenue about interest and penalty waivers. He suggested perhaps provisional tax payments could be suspended for the current tax year ending on 31st March and maybe also for the year to March 2024. But the key priority is to get cash in the hands of businesses immediately. “Just put it into the bank accounts. What's needed is cash to pay bills.” And that's the most important thing of all, is whatever is decided has to be done quickly. Everyone needs government assistance to happen as quickly as possible.

Other suggestions that might be made is obviously the wage subsidy. But I would think that the Government doesn’t want to use the wage subsidy, then the Small Business Cashflow Scheme, which was also hugely successful, is another mechanism still in place. It should be possible to open it up immediately to for affected businesses.

What I would suggest is that the amounts available are substantially increased. Under the scheme set up in 2020, there was a limit of an initial $10,000 plus up to $1,800 dollars per full time employee, up to a maximum of 50 full time employees. I think you need to more than double those limits because whereas COVID-19 was an event which interrupted businesses with Cyclone Gabrielle we're talking about business interruption and physical destruction of property. Businesses affected will need more than $10,000 to get back on their feet as quickly as possible. I think, for example, you could lift the limits to say an initial $25,000 plus, say $4,500 per full time employee.

Another tax measure which we've used in the past is tax loss carry-back. If you remember, these rules were introduced temporarily in 2020, and allowed losses for the year ended 31st March 2021 to be carried back to the March 2020 year. There was some work done on making these a permanent part of the Income Tax Act, but work on that stopped I understand because of fiscal pressures.

Again, we're facing something that needs immediate action and here's something off the shelf we can use. All it would require is a Supplementary Order Paper to extend reintroduce the section for the current tax year and maybe the next year as well. I actually expect Inland Revenue probably working on this at the moment.

Another possible mechanism that we've used could be used again would be a variation on the Cost of Living payments. I know they were controversial because some payments went to the wrong people. But again, Inland Revenue ought to have the data to say, “Well, we know all these people live in the affected regions. So here’s $500 to every adult in that region.” An immediate cash drop to help.

And so, as I said, those are some of the options we can consider. And no doubt people will have some other ideas. And the key thing here is none of what I've mentioned is revolutionary or requires completely designing something from the ground up. They're all mechanisms we've used previously and not so long ago and therefore should be able to reactivate. This is a major event, and we need to get relief to those affected as quickly as possible.

Thinking more broadly ...

Now moving on, the debate has already begun about how to pay for this assistance and also further climate adaptation, which is now going to be required. It's interesting to see a shift in thinking very rapidly on this stage. Now, in my view, this is a debate we should have been having for some time now. There are plenty of official reports which have alluded to the issue of the cost of dealing with climate adaptation and how to fund it.

And one I want to talk about for the rest of this podcast is Te Hirohanga Mokopuna in 2021, which is Treasury's combined statement on the long-term fiscal position and long-term insights briefing. Treasury is required to produce these reports every four years. It was due in 2020 but got delayed to 2021 because of COVID. Obviously, when Te Hirohanga Mokopuna was released in September 2021, the effects of COVID 19 were high on the agenda.

But as the executive summary noted, “it is not only the COVID 19 pandemic that we must consider other economic and societal matters such as climate change and population ageing must also be factored into the long-term fiscal position of New Zealand.” These reports may take a very long-term view, looking at 40 years or more.

Treasury's conclusion about COVID 19 response was quote.

“While the fiscal response to the COVID 19 pandemic has caused net debt to increase significantly, the Treasury views this response and current debt levels to be prudent. In any event, the Government's fiscal response has helped prevent a deeper and longer lasting recession, which could have had long-term impacts on New Zealand's wellbeing.”

After dealing with the immediate impact of COVID 19 the briefing then pivots to talk about climate change, which it  notes

“… will impact the fiscal position through both the physical impacts of a changing climate, such as more frequent and severe weather events, and the transition to a net zero emissions economy by 2050. Climate change has started to impact New Zealand today, but the long-run effect is highly uncertain at this stage. 

More frequent and severe extreme weather events and the gradual increase in temperature and sea levels will have economic and fiscal impacts in the future, which adaptation policy today could reduce.”

So, there you have it. In September 2021 Treasury pointed out the climate change scenario which we just encountered in the past three weeks firstly in Auckland with the Anniversary weekend floods and now with Cyclone Gabrielle was already happening. It’s here and we have to deal with it.

To be fair, it's not just climate change the report is concerned about. It then discusses the impact of an ageing population, noting that 26% of the population is expected to be over 65 years old by 2060, compared with 16% by in 2020. Now what does that mean? Increased superannuation expenditure and rising health care costs. Treasury projects “the gap between expenditure and revenue will grow significantly as a result of demographic, demographic change and historical trends, in the absence of any offsetting action by governments.”

Treasury sees net debt increasing rapidly as a share of GDP by 2060. Its judgement is “there is currently no immediate need to reduce debt, but policy action will be necessary to reduce, achieve and maintain a sustainable debt trajectory over time. This will ensure that New Zealand is resilient to future shocks and future generations do not face an unduly large burden of debt.”

In my view we've arrived at the point where policy action is required right now. The Briefing then notes “Governments will need to decide how large an adjustment is necessary and at what time.” [My emphasis].  Now “adjustment”, and the word is used quite a bit in this report, is Treasury speak for tax increases and expenditure reductions.

The executive summary concludes.

“Changing tax rates or restricting expenditure growth can help close the growing gap between revenue and expenditure. However, analysis in this Statement shows that one policy change by itself is unlikely to stabilise debt over the long run. This means that future governments will likely need to draw on multiple levers and can consider trade-offs across different policy options in responding to our fiscal challenges.”

In other words, we're going to need both tax increases and expenditure cuts.

This, by the way, was a point noted by the last Tax Working Group, which recommended a capital gains tax to help meet these pressures. The pressures identified in 2021 were much the same as those noted in Treasury’s 2016 briefing, which featured heavily in the thinking of the Tax Working Group about what changes to the tax system was needed.

Now, as we know, a capital gains tax was rejected in 2019, and we also know that the Government was not keen to see this relitigated in its long-term insights briefings from Inland Revenue. So what options does Treasury see as viable in its 2021 briefing? Well, we'll examine those suggestions next week.

That's all for now. 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 time, kia kaha, stay strong.

Until next time kia pai te wiki, have a great week!

*Terry Baucher is an Auckland-based tax specialist with 25 years experience. He works with individuals and entities who have complex tax issues. Prior to starting his own business, he spent six years with one of the "Big Four' accountancy firms including a period advising Australian businesses how to do business in New Zealand. You can contact him here.