While 1 April marks the start of the 2023 tax year, most New Zealand accountants will be heaving a sigh of relief with the completion of their clients’ 2022 tax return lodgements. “Because our members are tax agents and get an extension of time in which to file a tax return, they’re filing tax returns up to a year later,” says John Cuthbertson FCA, Chartered Accountants Australia and New Zealand tax leader, New Zealand.

It has not been plain sailing for all, however, with some members and their clients still experiencing COVID-related disruption and the knock-on effects of an extended filing period for the year prior. Added to this is the significant disruption caused by recent adverse weather events across affected regions in the North Island. CA ANZ is in regular communication with Inland Revenue (IR) regarding possible tax relief measures to support tax agents, affected clients and communities more widely.

Cuthbertson says some of the big BAU (business as usual) issues members have had to manage were the tax-related changes to the residential land rules, in terms of interest deductibility for rental properties and the bright-line test. This legislation will also impact the current tax year.

“The extent of the domestic trust disclosure rules was also another pain point for our members,” Cuthbertson says. “We worked hard to effect change regarding both the application of the rules and extent of required disclosures, but didn’t get all we wanted. Now, we are continuing to advocate to ensure the rules are practical and workable.”

Bringing back greater compliance

With the end of the COVID-19 Protection Framework in September 2022, operations at IR are returning to normal, and that means a return to regular levels of tax debt policing and integrity checks.

“Compliance enforcement activity was dialled right back over COVID times, as IR had to reprioritise its limited resources. Tax investigators were used to man the phone lines among other duties,” says Cuthbertson. “That was problematic because there was no real deterrent for people not complying with the rules. We had members with clients querying advice which correctly accorded with tax legislation, when other taxpayers they knew were not doing things properly and appeared to be getting away with it.”

He says a return to compliance activity is actually a good thing.

“Enforcing the rules is actually good for the tax base: it supports the integrity of the tax system and enhances voluntary compliance. It is important everyone feels it’s fair.”

Pictured: John Cuthbertson FCA

“Enforcing the rules is actually good for the tax base: it supports the integrity of the tax system and enhances voluntary compliance.”

That said, following floods in 2022 and early 2023, and damage from Cyclone Gabrielle in February 2023, IR is still adhering to instalment arrangements that have been made, and is open to discussing situations where taxpayers who have previously paid their tax are experiencing hardship.

“I don’t think IR has been unreasonable and they’re certainly looking at ways that they can assist, where people are impacted by these adverse events,” Cuthbertson says.

Farewell to the zombies

There is no doubt that some businesses which were already struggling pre-COVID were kept afloat by COVID-19 relief measures. In essence, they received a stay of termination and unless they can achieve a radical turnaround they will fail, as the money tap is turned off and their debts are finally called in.

“Businesses that got an instalment arrangement had to show they were likely to remain viable in the near term. So, IR looked to support those businesses that could be saved.”

Spotting the outliers

IR has made a significant investment in business transformation and it will be looking for a return on that investment. IR can collect and interrogate data from various sources. It has electronic access to property transfer records providing intelligence on property sales that may be subject to the bright-line residential property legislation. It has the ability to analyse individual income tax return filings and the newly introduced domestic trust disclosures to discern any behavioural changes following the reintroduction of the top 39% tax rate for individuals. Plus, it has powerful data analytics to help identify industry outliers and better target tax compliance and enforcement activity.

After an information-gathering phase looking at tax returns over the last year or two, IR is putting it all together, and Cuthbertson says they’ll have quite a good picture of what’s going on.

“I suspect we’ll see more compliance enforcement activity over the coming months and questions asked regarding the business rationale as to why things were done in a certain way. If you can’t provide a decent answer, it may escalate.”

On residential property, IR has access to computerised records through Land Information New Zealand when a property is sold. IR’s new system enables it to generate and send out letters to taxpayers referencing the property sale and advising that they may need to declare the income in their tax return. IR may also seek further information when a tax return is filed and no income is returned on the property sale.

Cuthbertson says the system is fallible, in that the dataset has not always been appropriately reviewed and parameters adjusted accordingly before query letters are sent out. This has improved with time.

Despite some initial teething problems, the new system is empowering IR to actively engage with tax agents and taxpayers. “Audit activity is starting to pick up, post COVID resourcing constraints, and IR is able to intervene and raise queries more promptly,” he says. “If you’ve got an outlier situation in terms of the profitability level for an industry, IR will look at your circumstances and why you might be different. If it’s not obvious they’ll ask, so you can expect to at least get a query and potential audit activity may follow.”

Donations and FBT rules

Two areas Cuthbertson hopes will be addressed by IR include the adoption of a permanent concession for donated trading stock and an overhaul of fringe benefits tax (FBT).

In the first instance, if a client donates foodstuffs to food banks, they would ordinarily be taxed as if they had sold the goods at market value. Temporary relief has been provided following on from the COVID response and, more latterly, the recent adverse events that hit the North Island. This relief, which thankfully applies more widely, expires on 31 March 2024.

With even middle-class families tightening their belts owing to the cost of living, in-kind support is needed now more than ever. Cuthbertson says it is important that a permanent tax solution is achieved and that foodstuffs that might otherwise have ended up in landfill are utilised for the good of our community and environment.

“The tax settings don’t have to be generous, but they shouldn’t penalise businesses that make these donations,” he says. “We understand this started out as an anti-avoidance measure, but it’s way too broad. We need to be able to allow people to donate goods to charities or to third-party organisations without taxation penalty for their good deeds.”

Another area of concern is the current scope and application of the FBT rules, their complexity, and perceived non-compliance. While CA ANZ recognises that FBT needs to be retained in some form to buttress PAYE on monetary remuneration, it is now time to reimagine and resize it, commensurate with the modest amount of revenue that it generates. Cuthbertson says FBT is no longer fit for purpose and should be limited to in-kind remuneration, taking into account changing work practices (home as a workplace) and the increased focus on employee health and wellbeing. The rules should also be significantly simplified, particularly with respect to motor vehicles.

The “other benefits” category currently picks up birthday or condolence cards and flowers – items that would not be viewed by most as an employment benefit. This category is also disproportionately costly to comply with and prone to error.

“Unfortunately, any substantive change to FBT is still some time off but we’re advocating for it, and have been for a while,” Cuthbertson says.

Pain points and support

IR’s business transformation hinges on an online, self-serve platform. Consequently, one of the key pain points members identified in the joint CA ANZ and TMNZ (Tax Management New Zealand) IR satisfaction survey last year was communications with IR – especially phone-based support.

Cuthbertson sympathises.

“Telephone support has been a perennial issue for our members. While it may not be set up as the first port of call, it is important that various lines of communication remain available, including where a quick response is required,” he says.

“The IR phone system typically comes under pressure when the online and secure mail options are unavailable or there are service delays. In essence, there is a cascade effect. During COVID, the tax agents’ dedicated phone line was halted, with agents having to call IR on the main phone lines. IR call-centre staff shortages and initial technical knowledge deficits as additional staff were onboarded also contributed to a reduced member experience – increased wait times/disconnections or requirement for follow-up calls.”

He stresses if members experience issues when dealing with IR that they can’t resolve with their IR account manager, CA ANZ can help.

“In appropriate circumstances, CA ANZ can also escalate concerns relating to the management of a tax investigation. We would typically only become involved regarding process. There is an expectation that the member has first discussed their concerns with the IR investigator and manager,” he says.

“This might apply if a member doesn’t believe an investigator is listening to them properly or has made up their mind and is not giving things due process, or the scope of the investigation seems to be out of control.”

Resources

For CA ANZ support with IR-related issues, email: [email protected]