If ever a year deserved a full stop, it’s 2020. In the Beatles’ immortal words “I read the news today, O Boy” (A Day in the Life). However, it also needs some reflection.
For many, a roller coaster ride best fits the description of the year. The very nervous anticipation of not knowing what awaits as the carriage inches its way to the first drop, followed by multiple highs and lows, and the relief that it’s almost over and wasn’t all that bad as the carriage slows to a stop. From the ride (so far), it is easy to forget how uncertain we were at the beginning.
The heavy lifting of the Government’s fiscal response was done by the wage subsidy. Initially, it was quite targeted and then quickly expanded so many businesses “qualified” for support. A scheme designed and implemented very quickly was always going to have rough edges and for the most part, it succeeded. It delivered money to businesses that needed it so they could continue and keep staff employed.
However, the scheme lacked policy clarity – was it to retain staff? To support business more generally, by helping keep the lights on? What else did you need to do first (try to raise capital or borrow more, not pay any dividends)? Many made decisions which, with hindsight (or 20/20 forecasting), perhaps “don’t look right”. That has left them between a rock and hard place – entitled in terms of the scheme rules (as they were designed at the time) but undeserving in the court of public opinion (when viewed after the fact). That has added to uncertainty.
Hopefully, lessons have been learned for future policy design and even more hopefully, they won’t need to be implemented a second time.
As a result of COVID-19 there were three big ticket tax policy responses:
- Commercial building tax depreciation deductions are now allowed;
- A temporary tax loss carry back rule was implemented (to be followed shortly by a permanent rule); and
- A business continuity rule for tax losses was announced.
All three are good tax policy, absent COVID-19. The rationale for removing building tax depreciation was always, excuse the pun, on shaky ground. The tax loss rule changes acknowledge commercial realities – business results do not spread neatly over tax years and a business is overtaxed if its shareholders change, even if the business does not. We look forward to these changes becoming permanent features of the tax system.
Inland Revenue issued a range of determinations and interpretations to help administratively. Although certain things could have been done more quickly, the overall speed of its reaction, compared to its historical approach, was surprising. The speed was nearly as astonishing as some of its decisions. Inland Revenue pushed the boundaries of what it thought it could do, to help taxpayers, without law changes. (This suggests to us the “care and management” boundaries it previously applied to rule out changes were self-imposed). It was good, and necessary, that the Commissioner took the risk to make the system work.
No new taxes or rate increases, other than a new top personal rate (more on this below), to fill the COVID-19 fiscal hole have been announced. In our Repairing Government Finances: Some taxing options document, we said there was no immediate need for new taxes (and, in fact, these might slow the recovery). COVID-19's fiscal effects have still to play out and, from this vantage point, the damage may not be as bad as expected. Taking time to see if a tax response is required still seems to us to be the right call.
As part of its election policy, the Labour Party campaigned for a 39% tax rate on incomes over $180,000. That policy was enacted along with other “consequential” changes in an Act passed earlier this month, with application (in the main) from 1 April next year. As our Taxmail noted, these changes will over tax certain fringe benefits and employer superannuation contributions. This should be corrected.
The 39% tax rate itself should not make a massive difference to the tax system as most are unaffected. However, the Act and the accompanying policy and cabinet papers foreshadowed more significant changes and risks. The Act contains trust information collection powers for Inland Revenue. (The trust tax rate is unchanged at 33%). The accompanying papers refer to “other integrity measures” being considered for a report to Government due in February 2021. The new trust information powers and additional policy thinking indicate a focus on activities that may be considered unacceptable. However, this will be too slow as taxpayers are asking the question now – what am I allowed to do without running foul of the taxman and section BG 1 (the general anti-avoidance rule)?
There should already be clear guidance published by Inland Revenue. Taxpayers should not be left to remember what has changed since 2000, when we last had a 39% tax rate – for example, personal services attribution rules and the Penny & Hooper decision. It should be clear, through updated current guidance, what Inland Revenue considers is acceptable and what is not. Otherwise, we can look forward to possible law changes in around three years’ time and Court decisions in around ten years’ time to enlighten us.
In case, you are wondering what integrity measures might be considered, we expect that further deeming of taxable dividends (for transactions between companies and their shareholders, such as overdrawn shareholder current account) may be on the table. Consideration of a 39% tax rate for income retained in a trust would not be surprising, even if politically unpalatable given the election promises. Both require careful thought (while the latter may only be implemented post-election 2023).
As with any year, we can expect that tax policy will not stand still in 2021. There is a current tax bill before select committee and numerous on-going consultations which will result in more changes next year, and beyond.
We started this reflection with a Beatles quote. It has been a year that there is no single apt quote to finish. For each, our experience of the year will leave us with different personal perspectives and energy. We have chosen two, from the same artist as before:
Hey Jude, refrain
Don't carry the world upon your shoulders
Hey Jude, don't make it bad
Take a sad song and make it better
Thank you and best wishes for the festive season
Finally, we thank our readers for taking the time to read Taxmail and provide feedback. We trust you found it thought provoking and helpful and we wish you all a safe, happy and restful holiday.