Government Tax and Social Policy Work Programme

Last November, Minister of Revenue Simon Watts announced the Government’s tax and social policy work programme, outlining its priorities in this space. The programme covers the following six workstreams:

• Economic growth and productivity
• Integrity of the tax system
• Modernising the tax system
• Strengthening international connections
• Social policy
• Other agency work

Among some of the more interesting items outlined are reviews of fringe benefit tax, the foreign investment fund rules and thin capitalisation settings for infrastructure. A discussion document on the foreign investment fund rules has been released, with others being issued shortly.

Baker Tilly Staples Rodway is providing feedback to government on these topics given the level of impact these rules have on you and your business. If you have any questions or comments, or wish to submit on the discussion documents when they are released, please contact your Baker Tilly Staples Rodway advisor.

Inland Revenue is clamping down on taxpayers

After being Mr Nice Guy for much of the previous five years, Inland Revenue came back with a vengeance in 2024. In the quarter ended 30 September 2024, it opened 1,908 audits, up 55% on the quarter ended 30 September 2023. In the same quarter, some $1.2 billion of overdue tax debt was collected and 296 liquidations were filed. With government pouring millions into Inland Revenue audits, and an expectation these audits will yield $8 for every $1 spent, this activity is certain to continue.

Times have also changed when it comes to tax enforcement. Inland Revenue’s relatively new computer system is far more powerful than its predecessor and has access to a wider range of data – for example, property transactions. 

This not only means Inland Revenue is now able to remind taxpayers of their bright-line obligations, but it also has a paper trail, enabling its team to audit taxpayers who might have undeclared rental income, or speculators and developers who have not declared their profits on property sales.

Another example of where a wider range of data is available is in the cryptoasset space, with Inland Revenue able to trace millions of cryptocurrency transactions and audit taxpayers who may have had income arising from those transactions.

Beyond systems upgrades, Inland Revenue has also become more sophisticated in locating tax cheats. One example cited was a review of reward points data collected by supermarkets and other retailers to identify high spenders, then a cross-check of this data against the declared taxable income of those same individuals. Discrepancies naturally led to audits.

Inland Revenue has paid particular attention to:

• Liquor stores
• Vape stores
• Hairdressers
• Nail salons

While Inland Revenue is coming down with a big stick, it is still recognised that the vast majority of taxpayers are honest citizens and Inland Revenue is willing to be reasonable where a genuine error has arisen. If you are concerned about any of your tax affairs or are facing an audit, speak to a Baker Tilly Staples Rodway tax specialist who will be able to assist.

Charity-owned businesses under scrutiny

Charities that derive business income and apply it to New Zealand charitable causes have long been exempt from tax on the basis the income will eventually be utilised for charitable purposes. While this is helpful for the local op shop run by the Salvation Army or Vinnies, it has also been utilised by businesses as diverse as Sanitarium and BestStart Educare, and as a result has come under heavy criticism in recent years.

For many years, there had been little guidance on the practical application of the business income exemption, but Inland Revenue has now rectified this. Some key items in the guidance are:

• A tax charity donating to charitable purposes outside New Zealand is carrying out charitable purposes outside New Zealand – and this includes charities listed in Schedule 32 of the Income Tax Act 2007. 
• Not all donations made by tax charities to charities with some overseas purposes will be for those overseas purposes. An example might be where both parties expressly agree the donation can only be used for the recipient’s New Zealand charitable purposes.
• Tax charities can apportion business income between exempt New Zealand charitable purposes and taxable non-New Zealand charitable purposes, but the split must either be consistent with the interpretation statement or be a reasonable split.
• Once a tax charity determines an approach to splitting its business income that is reasonable, this same approach can be used each year until there is a material change in the tax charity’s operations.

We expect, with guidance now being available, Inland Revenue will be paying closer attention to charities operating businesses to ensure their income is only being applied to New Zealand charitable purposes. If your charity derives business income potentially falling within the scope of this interpretation statement, please feel free to contact your Baker Tilly Staples Rodway advisor to discuss this further.

Overdrawn shareholder loan account balances

In November, Inland Revenue released guidance on common tax issues associated with overdrawn shareholder loan accounts held in New Zealand resident close companies. Some of the common issues discussed include:

• Dividend income arising to a shareholder where no or low interest has been paid on their overdrawn shareholder loan account.
• Fringe benefit tax liabilities arising where a shareholder-employee pays no or low interest on their overdrawn shareholder loan account.
• Interest income arising to a company charging interest on an overdrawn shareholder loan account.

As with many Inland Revenue interpretation statements in recent times, the topic is covered off thoroughly. Noteworthy examples include discussing the fundamentals of a dividend, calculation methodologies, timing rules that might be applicable and the natural consequences which flow, including the derivation of interest income and application of the financial arrangements rules.

It is noteworthy that overdrawn shareholder loan account balances held by shareholder-employees are subject to fringe benefit tax and not the deemed dividend rules. This could create potential compliance issues where the shareholder employee is not provided with any other benefits subject to fringe benefit tax.

The guidance itself helped formalise the understanding of most practitioners around the rules and should mean they are applied correctly and consistently going forward.

It is always good to have discussions about managing an overdrawn shareholder loan account ahead of balance date, as this gives you access to the greatest number of options. If you have any queries in this regard, please contact your Baker Tilly Staples Rodway advisor to discuss further. 

Looking ahead to the 2025 budget

The government has announced it will be releasing the 2025 Budget on Thursday, 22 May. The Minister of Finance has indicated that it will see the closing of loopholes in the charity space. There has also been speculation in recent weeks that there might be a decrease in the corporate tax rate as part of attempts to stimulate growth in the economy. 

Should the government choose to decrease the corporate tax rate, the big question will be what happens to imputation credits generated from corporate profits. The last time the corporate tax rate was lowered, companies were given two years to clear imputation credits generated from corporate profits prior to the rate cut and we would hope a similar opportunity would be granted. Baker Tilly Staples Rodway will keep you informed of any changes in the 2025 Budget that might impact your business.