Te wiki o te tāke – because tax is basically about politics (benefits for your supporters, paid for by your opponents), there are fights over the cost of living payments, who will pay for climate adaption, trusts, and who can unethically rort the system

As this week has demonstrated, tax ultimately is about politics. I was surprised, although I shouldn't have been, by the amount of attention the first wave of cost-of-living payments attracted. However, once media reports emerged about payments being made to ineligible persons, then it was all on for politicians of both sides.

As I said, I wasn't surprised that there were a few teething areas initially. Statistically, this is going to happen when you consider Inland Revenue is expecting to make payments to approximately 2.1 million persons. That said, even allowing for human error one or two of the cases that have been reported of ineligible persons receiving payments, should not really have happened.

To recap, the purpose of the cost-of-living payment was, as a special report from Inland Revenue explained, “to quickly address the impacts of cost-of-living increases on low to middle income individuals and households”. The payment of $350 is being paid in three instalments over August, September and October. Unlike the Wage Subsidy and other COVID support mechanisms such as the Resurgent Support Payments, there is no need for a person to apply for the payment, instead, it will be paid automatically by Inland Revenue to eligible individuals.

In order for a person to receive a payment, they must have net income for the year ended 31 March 2022 of $70,000 or less. They must also have not been eligible to receive the winter energy payment, are aged 18 or over, are both New Zealand tax resident and present in New Zealand at the time of the payments and are not in prison. And as the Inland Revenue special report notes, “the payment is not intended to be paid to those who are deceased.”

However, criticism of the process so far has focused on a number of recipients living overseas who apparently did advise Inland Revenue that they are no longer resident in New Zealand but still received payments. It's just worth noting here that as the criteria points out, an eligible person must both be New Zealand tax resident and present in New Zealand.

Although it's not the topic of today's podcast, this is a reminder you can be deemed to be tax resident in New Zealand, even though you are not actually present in New Zealand under what we call the permanent place of abode test. This may apply to people who have left temporarily New Zealand maybe for one or two years on an overseas experience. Such persons could still be tax resident in New Zealand, but they wouldn't qualify for the cost-of-living payment because they're not present in New Zealand.

However, it appears that some people who have left New Zealand and told Inland Revenue they had still received a payment. There's also been a few payments who made to people who have been deceased. And although the Minister of Revenue, David Parker, quipped in Parliament, quoting James K Baxter, that dead people can't update their records, this is still a little surprising, although but it may be that no one has got around to updating Inland Revenue about a person’s death.

So far, of the anticipated 2.1 million, only 1.3 million people received the first instalment at the start of this week. But according to Inland Revenue the other 800,000 or so will receive payments once they have either filed their 31st March 2022 tax return or completed the auto-calculation process, by responding to enquiries from Inland Revenue, for example.

Ultimately, any system is only as good as the quality of the data it holds. As I said, with potentially 2.1 million recipients, errors were inevitable, either as a result of Inland Revenue incorrectly entering data or taxpayers not informing Inland Revenue of changed circumstances. Inland Revenue has said it will not take action to pursue overpayments. That's attracted some criticism because that so far is estimated to have cost $7 million.

On the other hand, under Inland Revenue’s auto assessment process, at the end of each tax year it automatically calculates a taxpayer's liability, if a taxpayer owes less $50 or less that debt is written off and Inland Revenue will take no action to collect it. According to Inland Revenue’s Annual Report for the year ended 30 June 2021 the total amount of such debt written off in that period amounted to $24 million.

In that context and taking into consideration the resources required by Inland Revenue to pursue accidental overpayments, its approach that it generally won't take action to pursue any accidental overpayments seems reasonable. It will take action where there has been an attempt to defraud. These mistakes happen and perhaps some shouldn't have happened, but devoting extra resources to chasing relatively amounts isn’t the best use of Inland Revenue’s resources. People are pretty honest and many who have received a payment incorrectly may either try and return it or give it to charity.

As previously discussed, Inland Revenue was actually quite reluctant to take on responsibility for these payments. But, as I told TVNZ and I understand the former Deputy Commissioner of Revenue, Robyn Oliver, said the same, it’s hard to see which other agency would have been able to do this. The other alternative would have been the Ministry of Social Development, but Inland Revenue already has the majority of the details for those potential recipients.

As I mentioned, however, there have been a few surprises about some of the incorrect payment details we've heard about. I do find it hard to understand how a payment could have been made to a non-resident who has filed an IR3NR non-resident tax return. But reports are coming in that that has happened. This does point to a potential systemic error, which is concerning. And I've seen comments on LinkedIn from ex-Inland Revenue staff who are about concerned about additional strain of delivering these payments on an already pretty stretched workforce.

Incidentally, on the question of non-residents, it's worth remembering that the alternative of tax cuts which the opposition has been promoting would mean that non-residents would have also benefited from the tax cuts. Here in New Zealand, unlike in Australia, we don't discriminate with the application of tax rates to non-residents. The tax liability of every person is determined using the same rates, regardless of tax residency. Whereas in Australia, non-residents pay higher rates.

In due course, we will get more exact details of the numbers of apparently ineligible recipients and the amount incorrectly paid. No doubt journalists and the National Party have already applied for this data under the Official Information Act. In the meantime, the politicking will continue.

Who will pay for climate adaption?

Moving on, the country's first national climate change adaptation plan was released this week. And it had some interesting data including a particularly concerning point that over 675,000 people and $100 billion of residential buildings are in flood prone areas. This is going to be one of the priority areas under the plan - how are we going to adapt to increasing flood change? We've just had the wettest July on record and four flooding events. It’s not a question of adapting to future climate change, it’s adapting to what’s happening right now.

The other important issue is how are we going to pay for this? And the plan was actually really silent on the whole matter. It said nothing about tax other than noting that climate change may reduce tax revenue. Now climate change is a fiscal risk and so the Budget, Economic and Fiscal Update (BEFU) in this year’s budget does cover the issue. It notes “Climate change poses a significant challenges to New Zealand's wellbeing and to the Government's fiscal position and operations.” The BEFU notes the risks are in two domains mitigation, taking action to reduce emissions and adaptation, adjusting to the actual extent effects of climate change.

The Budget did include several mitigation measures in fiscal forecasts, including $1.5 billion allocated to the Climate Emergency Response Fund over the forecast four-year period. The BEFU noted:

“Over the longer term, mitigation costs to achieve international and domestic targets are likely to be significantly higher than the amount that has currently been allocated to the CERF, but are not yet sufficiently certain for particular years to be included in the fiscal forecasts.”

The BEFU also comments about the specific fiscal risk of meeting the nationally determined contribution to global mitigation efforts under the Paris Agreement. The budget emissions budget for the target period of 2021 to 2030 is 571Mt. “To achieve this, New Zealand will need to pursue sizeable domestic and likely offshore abatement to mitigate emissions over 2021 to 2030.”

So, there's a real issue here which isn’t being discussed very widely about how are we going to pay for climate change? What are the alternatives? Is it going to come out of general taxation? Is it going to be a special levy? The budget forecasts did not have anything specific in relation to the cost of adaptation measures.

I was asked at a presentation last year whether our tax settings were right and if tax increases were needed. I raised the possibility of having a one-off wealth tax to start to build up funds to deal with climate change. As noted above, there's $100 billion of residential property at risk in flood prone areas. That will involve costs of either moving people away from those areas or building the defences to enable them to continue to live there. There is no doubt in my mind that those regions will need assistance from central government, they won't be able to do it all at local rates.

This is a discussion we should be having about our tax policy settings. And by the way, this comes on top of a point in an earlier podcast made about the future funding of the National Land Transport Fund. The temporary fuel and excise duty and road user charge cut will cost $589 million. And as the proportion of electric and hybrid vehicles rise over time, the funding of NLTF will fall. So, what are we going to do there? Probably at some point electric vehicles will have to start paying Road User Charges, it's probably the only way you can continue to fund the NLFT.

Going forward, we are going to be talking more and more about climate change, its impact and increasingly about how are we going to pay for the adaptation and mitigation policies.

NZ trusts with UK property for a beneficiary

Moving on, an issue has popped up which may affect New Zealand trusts with properties in the UK. Particularly trusts which have purchased a property for a beneficiary living in the UK. These properties are not rented out and are not deriving any income, so they have no UK tax filing obligations.

However, what is being overlooked here is the impact of several European anti-money-laundering directives, which have led to the creation of a UK trust register. The registration requirements have been expanded recently to include all “express trusts” not just those deemed UK tax resident but including those with UK property.  Any trusts required to register must do so by 1st September.

There's probably a wider issue for other New Zealand trusts that have income from UK sources and also have UK resident beneficiaries. They may well also be required to register under these new regulations.

An ethics-free Trump tax rort

And finally this week, Donald Trump has just given us the perfect illustration of Benjamin Franklin’s remark “Ïn this world nothing can be said to be certain, except death and taxes” after emerged that Ivana Trump, Donald Trump's first wife, has been buried near the first hole of a Trump owned golf course in Bedminster, New Jersey.

A strange place you might think until you find out that under the New Jersey Tax Code a cemetery is exempted from all property, income and sales taxes. And therefore, as a tax researcher noted this is a trifecta of tax avoidance planning.

Although you might think it's incredibly on-brand for Mr. Trump to have been involved in such clever planning, it does raise some interesting ethical questions about how far you push it as a tax planner. This is one of the issues about dealing with a client like Trump. If you don't tell him this opportunity exists and he finds out from another adviser, then you're out of work and you probably won't get your fees paid either given what we know about him. On the other hand the rest of the family may well have consented to this happening and it's not entirely all down to Donald Trump.

Tax planning is a really difficult ethical issue. One of the advantages of the New Zealand tax code, fortunately, is it doesn't have so many specific exemptions as we see in the US. Advisers everywhere have to be alert to these opportunities, but then have to consider the ethics involved. And people may be surprised to hear this but, in many cases, when aggressive strategies are presented to taxpayers they will decline them as being beyond the pale. But clearly, when Mr. Trump is involved, nothing is beyond the pale.

Well, 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 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.