BUDGET 2022 – BDO overview - Tax
With Budget 2022 fast approaching we’ve once again been thinking about our tax “wish list”. Even though we aren’t expecting much on the tax front, it doesn’t hurt to dream. Some of our broader dreaming follows.
While tax law is constantly changing, in recent times the pace of change has increased rapidly.
The formalised process for introducing new tax law, which has been in place for some time, is called, the "Generic Tax Policy Process” (“GTTP”, not an acronym for a rapper).
A key feature of the GTTP is that it builds external consultation and feedback into the policy design and development process, providing opportunities for public engagement at several stages. The GTTP is generally regarded as a best practice model for consultation.
There have been recent examples where the GTTP has not been followed, such as with the new trust disclosure rules. By not following the GTTP we can end up with poor tax law that requires remedial legislation to put it right.
Simplicity is the ultimate sophistication
A key feature of a well-developed tax system is that it collects the highest amount of revenue with low cost of compliance. We are starting to feel very much as though we are moving away from the ideal model. We have a regime full of complexity and compliance requirements including, for example:
- New trust disclosures (a lot of disclosures...).
- Complicated interest deductibility rules for residential property (new build, old build phase out).
- International tax rules that make life very hard for our SMEs to expand internationally and understand the tax issues they face.
- Proposed changes for sales of shares of closely-held companies (a notional dividend, or capital gains tax by stealth, approach).
We appreciate that sometimes complexity is needed to advance fairness, however is the pendulum swinging a bit too far? We’d like to see:
- More thresholds and compliance support for businesses expanding overseas. For example, a company in New Zealand that transacts with a related company in Australia is required to ensure that the transaction is set at a market rate. There’s quite a process to go through in determining a market rate, which involves comparing what another non-related entity would ordinarily expect to receive. We have some safe-harbour thresholds for setting prices for, say, the providing of management services, but we’d like to see more. With the information Inland Revenue holds and great technology, could Inland Revenue determine more comparables and set more thresholds? Thresholds before Base Erosion Profit Shifting (“BEPS”) anti-avoidance legislation kicks in. What should you do with a “hybrid”...? We won’t explain it, it’s complex.
- A change to our depreciation regime, perhaps a move to a fixed rate diminishing value often adopted by other countries. At the moment we have pages and pages of rates linked to either asset and/or industry. It’s really easy to pick the wrong depreciation rate which redirects your valuable time trying to find a rate that fits.
We are concerned that high costs of compliance lead particularly to two undesirable outcomes: non-compliance and a regressive impact (that is, “their burden falls disproportionately on those personal taxpayers on lower incomes and those business taxpayers with lower levels of profit”, Tax Working Group, February 2019). As final comment, if we want to automate (“digitise” to be fancier), it will be very hard with a complex system; we may need more de minimis thresholds and an ability to accept “close enough is good enough…”.
We’ve seen it recently. Support came very quickly with a reduction in excise on petrol.
Can more to be done to support (and promote simplicity)? For example:
- Low value asset write-offs to exceed the current $1,000, even going back to $5,000 would be helpful.
- WFH. It’s a favourite of ours, are we doing enough in terms of the “new” way of working? Should there be a greater ability for employees to claim deductions or does the extra compliance outweigh this (a question to be asked and answered perhaps)?
- Find a solution (per above) for double taxation, don’t just focus on the few that can structure for double non-taxation.
There’s plenty we can talk about. But we wish that together we drive for simplicity and support for New Zealand business.
Hear more on topical tax issues from our Eyes on Tax team