Te wiki o te tāke; The New Zealand Tax Podcast – a new tax year so in with the new but the old issues remain

Happy new tax year and welcome to the 2023-24 tax year and as is often the case the start of a new tax year it means newly enacted legislation is now in place.

However, some of the same old issues are still with us.

The Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill (Number 2) finally received the Royal Assent on 31st March. Apparently this bill had nearly 200 new clauses, which between them had some 42 different application dates. So, it was a surprisingly complex bill. But remember, its most controversial proposal to standardise the treatment of GST on fund management firms was removed.

As noted, the bill has got quite a considerable amount of new provisions in it, and we'll pick up several over the next few weeks. But I want to start by looking at the new fringe benefit tax (FBT) exemptions for bikes and public transport. As you may recall, the bill originally had an exemption for public transport, but at the last minute an FBT exemption for bikes was introduced. That actually covers bikes and “low powered vehicles”, so obviously covers scooters, e-scooters e-bikes. The exemption from FBT applies where you are travelling between home and work. There's going to be a maximum cost for the low-powered vehicles, which is yet to be confirmed by regulation shortly.

Watch out for the hook in the FBT exemption for bikes and public transport

But the key point to keep in mind is that the bike or scooter must be used mainly for travelling between home and work. Therefore, where that isn't the case, FBT would still apply. This together with the maximum price cap on the exemption should rule out people buying high end bikes, e-bikes or e-scooters and then using them mainly for private use hoping that it's exempt from FBT.

Now the exemption is from FBT, there is no equivalent exemption for PAYE. What that means, it is very important for employees to consider how they provide that benefit and don't make the mistake of assuming “Well, the FBT exemption applies so nothing to worry about.” The issue that arises is where the employer purchases the bike or scooter directly, then the FBT exemption should apply. However, if the employee chooses and purchases a bike personally and is then reimbursed, then PAYE will apply and there's no exemption.

This principle also applies to the exemption around the use of public transport or vehicle shares, such as Uber and similar apps. Again, the employer must incur the cost for the exemption to apply. As some have noted that's actually administratively quite awkward. It seems likely quite a few employers will accidentally trip up on this by reimbursing the employee rather than incurring the costs directly. The hope is that this particular anomaly can be quickly resolved and therefore ease the compliance involved.

Now, the new act also contained a permanent exemption from the interest limitation rules for build to rent dwellings. This exemption will apply where there are at least 20 connected dwellings, and the landlord must offer a fixed term tenancies of at least ten years. By the way, for the purposes of the interest limitation rules, as of 1st April, only 50% of the interest is now deductible unless one of the exemptions, such as a new build or build to rent, applies.

Interest limitation rules and short-stay accommodation – don’t get mucking fuddled

Coincidentally, last week, Inland Revenue released a draft interpretation statement for consultation on the interest limitation rules and short-stay accommodation. The interpretation statement considers how the interest limitations will apply and then also explains what other income tax rules may be relevant depending on the circumstances. The draft interpretation statement runs to 79 pages and is now common practice, it’s accompanied by a fact sheet.

It says much about the complexity of the rules in this area that the fact sheet runs to 13 pages. That’s because not only are the interest limitation rules applicable owners of short-stay accommodation must also take into consideration the potential application of the mixed use asset rules which have been around for over ten years now, as well as the ring fencing rules.

For the purposes of the draft interpretation statement, short-stay accommodation is defined as accommodation provided to paying guests for up to four consecutive weeks. The interpretation statement covers five scenarios where such accommodation is provided:

either in a holiday home;
in a person's main home;
in a separate dwelling on the same land as the main home;
in a separate property used only for short-stay accommodation; and
on a farm or lifestyle block.

Within each of those five scenarios, the interpretation statement will explain if and how the interest limitation rules will apply, what apportionment rules apply, and whether ring fencing rules apply. There are also variations within these scenarios. If there's a new build involved, for example, a person's holiday home is on new build land, then the interest limitation rules will not apply. However, the deductibility of interest is still subject to the other apportionment rules, such as those contained in the mixed-use asset provisions and the ring-fencing rules will still apply.

As can be seen, there's a great deal of complexity now involved, and this is partly the result of the somewhat ad hoc approach adopted by the Government in tackling what it sees as the preferential treatment of residential property investment. It also reflects generally incoherent policy resulting from the lack of a comprehensive capital gains tax. Whatever, the key lesson to watch out for is that the short-stay accommodation rules are now incredibly involved, so proceed with great care.

The taxation of capital is a longstanding issue and one which in my opinion, will need to be addressed sooner rather than later. Not only because of the tensions it creates within the tax system, but also because of the need to find additional revenue to meet the demands of an ageing population and the impact of climate change, which we've spoken about previously.

We like New Zealand Superannuation – but how are we going to pay for it?

And three reports this week highlighted this ongoing tension around meeting future liabilities. Firstly interest.co.nz covered a study coming out the University of Otago regarding New Zealand Superannuation. The study surveyed almost 1300 people in 2022 asking them what they felt about the age of eligibility, means testing and the willingness to increase both current and future taxes to pay for New Zealand Superannuation.

The study found there was widespread opposition to financial barriers for receiving superannuation. Means testing was not popular, but the support for keeping the retirement age at 65 has increased, with almost a quarter ranking the age of 65 as most important aspect of New Zealand super compared with a fifth back in the 2014 survey. 61% of those surveyed ranked raising the retirement age to 67 as the worst policy. The general response was they would prefer universal superannuation.

The New Zealand Super Fund, which has been established to help spread the cost of superannuation was popular. Although there was opposition to increases in current taxes to pay for New Zealand Superannuation, a majority of respondents still support higher current taxes to reduce the size of future increased tax increases given plausible investment returns.

A day earlier independent economist Cameron Bagrie told Newshub he had concluded New Zealand might need to introduce tax increases to have to deal with the impact of climate change and what he called an “infrastructure mess.” In his view, taking into consideration climate change, infrastructure and superannuation “If I step back, though, and think about tax rates in general over the next ten years, where do I think they're going to be headed? I think they're going to be biased up as opposed to down.”

Climate change will cost “multiple billions” under ALL scenarios

Bagrie will probably be reinforced in his view by the Climate, Economic and Fiscal Assessment for 2023 released last week by the Treasury and Ministry for the Environment. This report concluded,

It is clear that the size and breadth of the economic and fiscal costs of climate change to New Zealand will be large. The physical impact of climate change and the choices the country makes to transition to a low emissions future will affect every aspect of the economy and society for generations. These impacts will have flow on implications for the Crown's fiscal position.

What particularly seems to be concerning the Treasury and the Ministry for the Environment is that at present in the planning to help meet our climate targets there is an assumption that we will be purchasing offsets from offshore. As the report notes,

The cost of purchasing offshore mitigation to achieve New Zealand's [commitments] presents a significant fiscal risk. For all scenarios considered, our analysis estimates this cost to be multiple billions over the period 2024 to 2030.

Multiple billions in this case could range from a low-end estimate of around $7.7 billion to perhaps as high as $23.7 billion. Apparently, the costs involved represent between 3.9% to 28% of the new operating expenditure that will be made available in each budget. Therefore, if climate change is swallowing up to 28% of the new operating expenditure that puts pressure on other areas such as education and health.

The report also does discuss the tax potential tax implications. As noted at the start of section 6 on Fiscal Impacts, “Climate change will create multiple cost pressures for the Crown and is likely to negatively affect its tax base through changes to economic activity.” This presents a big question for policymakers and politicians -how do we have enough revenue to square the circle between meeting the demands for health and superannuation, and our climate change commitments? So that is why, like Cameron Bagrie, I think there is an inevitable pointer towards tax changes.

And on that bombshell, that's all for this week. 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 pai to rā. Have a great day.

*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.