A few weeks back I discussed Inland Revenue’s regulatory stewardship review of FBT, and I suggested it should be looking at improving its compliance in this area. Well this week Inland revenue has announced that it will be launching a campaign in October which will address common errors in FBT.
Actually, a footnote in the regulatory review referenced this campaign. The footnote noted “Particular attention will be drawn to FBT on motor vehicles with the primary audience being businesses registered for FBT and tax agents.” The footnote Information from tax filings that indicates an FBT error will also be used to determine whether particular taxpayers should review their FBT position
The common errors Inland Revenue expects to see includes calculating FBT incorrectly, applying the exemptions available incorrectly and using the best rate to suit a taxpayer’s circumstances. This latter one is now a particular issue as following the increase in the top personal income tax rate to 39% the equivalent FBT rate has risen to 64%. It’s already been noted there's quite possibly a risk that some FBT filers may be overpaying tax.
On the other hand, as Deloitte partner Robyn Walker observed in a LinkedIn post, Inland Revenue might perhaps need to also look at some employers who are not registered for FBT. According to the regulatory review only 83% of employers with 500 or more employees are actually registered for FBT, a statistic Robyn found surprising. It’s hard to imagine an organisation with that many employees not providing some form of fringe benefits.
Of course, sometimes what might be subject to FBT can be quite obscure. Apparently, over in Australia, the owner of a specialty shop in a shopping centre is liable for a ‘property fringe benefit’ by permitting staff to use centre toilets in common area. This is such an extreme example, it’s practically unenforceable and in fact is widely ignored.
On the other hand, as the regulatory review noted there's a fair bit of complexity to FBT now. There are probably quite a few employers who might well have provided fringe benefits without understanding that they were in fact doing so. The campaign begins next week and will run for four weeks. It will be interesting to see what comes out it.
Rejecting advice
Last month the Government unexpectedly announced that the build-to-rent sector would be exempt permanently from the interest limitation rule so long as tenants were offered leases of at least 10 years. Earlier this week it emerged this was contrary to advice from Inland Revenue and Treasury on the proposal.
Both agencies considered that the new build exemption which allows an interest deduction 20 years from the date a code compliance certificate is issued was sufficient. However, the build-to-rent sector was unhappy about the initial interest limitation rules and continued to lobby for a wider exemption which has now been granted.
For the purposes of the exemption, the build-to-rent development must consist of at least 20 dwellings. Inland Revenue advised the Government, because build-to-rent investors tend to be large institutional investors, this means the exemption “…could be viewed as inequitable, because it would benefit large investors but provide no relief for smaller investors who hold similar properties".
On the other hand, the Ministry of Housing and Urban Development supported the tax break, arguing the 20-year "new build" exemption wouldn't go far enough to encourage investment in purpose-built rentals. In its view,
"The initial policy (for interest limitation) did not take into full account the diversity of residential property supply and was mostly built around standalone properties. Emerging residential models such as build-to-rent were not captured in this model."
We probably haven’t seen the end of this controversy and you can expect to see more lobbying as the new tax bill containing this measure works its way through the Finance and Expenditure Committee submission process. Submissions on the bill are now open and the final date for submission is 2nd November.
In the fog of [tax] war
Last week’s UK mini-Budget sparked massive turmoil in the UK's financial markets, something not seen since the GFC and the 1992 crash out of the European Exchange Rate Mechanism. The proposed tax cuts are about 2% of UK's GDP and the largest in 50 years. To put them in a New Zealand context, they are approximately equal to $7.2 billion annually or four times the size of the tax cut National are currently proposing if they win next year's election.
Beyond the headlines of the very dramatic tax cuts for high income earners, there were a few points of interest, which I think have a New Zealand relevance. Surprisingly, for example, there was no proposal to cut either capital gains tax or inheritance tax, which for a party of tax-cutters odd, but may represent an acceptance that those tax settings are acceptable. On the other hand the nil rate threshold for Stamp Duty Land Tax was doubled to £250,000, and the threshold for first time buyers was increased to £425,000. Stamp Duty is still a significant tax in the UK (about £14.4 billion annually)
Something which has discussed quite a bit here is more generous capital allowances. The UK has what it calls the Annual Investment Allowance. This was temporarily increased to £1 million and was supposed to be reduced to £250,000 with effect from next April. Instead, it's going to be permanently set at £1 million. What that means is there's an immediate deduction for the full cost of qualifying plant and machinery (excluding cars) up to the £1 million threshold.
Something similar here would be very welcome. Treasury and Inland Revenue would oppose such a measure because of its revenue cost. But you can see its potential impact following the temporary increase in what we call the low value asset write off to $5,000 in 2020-21.
UK employers are also required to pay National Insurance Contributions on employee’s salary, currently at a rate of 15.05%. This is on top of the salary they pay. Inevitably, this led to attempts to work around this levy a trend accelerated by the increased use of contractors with personal service companies. This is something that's been going on for decades, I saw it when I was working in the UK nearly 30 years ago now.
The UK government has responded with a set of rules known as the IR35 rules to clamp down on such practices. The rules ensure contractors who would have been employees if they were providing their services directly to the client, pay broadly the same National Insurance Contributions as employees.
Inexplicably, the mini-Budget has repealed those rules with effect from next April. This is actually of interest to New Zealanders in two forms. Firstly, Kiwis working over in the UK have made use of personal service companies and I've come across instances where they've been caught up in investigations into their use by HM Revenue and Customs.
But they're also of interest here because the use of contractors and personal service companies might be something that could pop up in the context of the proposed social insurance levies that are currently working their way through consultation in Parliament. It could be that companies may attempt to use a similar mechanism to avoid paying those levies. The Government here might want to watch this much more carefully if the social insurance proposals do go ahead.
And finally, the UK has an Office of Tax Simplification, which was set up in July 2010 to advise government in simplifying the UK tax system. In another surprise move it will be abolished and its role in simplifying the tax code will be taken over by the UK Treasury and H.M. Revenue and Customs. It's an interesting move but a bit disappointing because it's always nice to have an independent agency outside tax authorities or Treasury looking at this sort of matter. On the other hand, the UK tax year still runs to 5th April, so a cynic might say maybe it hadn't got that far with simplification.
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.
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