- COVID-19 tax changes haven’t led to abuse of ‘social contract’
- Opportunities identified to make permanent tax changes pragmatic and beneficial to small businesses
At this time of year, we would normally be talking about the results of our annual Inland Revenue satisfaction survey. Instead this year's survey was about pandemic policy initiatives and how well Inland Revenue facilitated and operationalised these.
Overall the initiatives were deemed to have been a great success while Inland Revenue's performance garnered overwhelmingly positive responses. Those who joined us at our recent Tax Conference will have heard Brian Chapple from Treasury discussing the shotgun approach to COVID-19 responses. He called out that Government knew some measures would be more useful than others, but that given the circumstances it was best to tackle the challenge with the broadest range possible.
This gamble has paid off. The system hasn't been abused and the social contract has been maintained and at this stage it seems like the tax debt is manageable. The majority of tax payers intend to repay in full.
In the early days of lockdown, the NZ Tax Team were inundated with suggestions from members and our advisory groups about what Government could do to respond to COVID-19. Government picked up many of these. So, looking back what measures did or didn’t work? And how did Inland Revenue’s services stack up during COVID-19?
The Government’s “shotgun approach" is reflected in our survey results. Members and their clients were aware of a range of tax measures. But some, such as the increased immediate low value asset write off threshold, and the increased provisional tax threshold, were used more than others. We also asked whether these measures were perceived as useful to clients, or to member’s organisations in tackling the COVID-19 crisis. Unsurprisingly the most popular measures were also the most useful.
What we didn’t find
When we started planning this survey, New Zealand had only been out of level four for a few weeks. At the time, we were concerned that tax debt might balloon out and expected many members to say clients would struggle to make these repayments.
We asked members whether they or their clients were aware of the ability to defer tax and have the use of money interest (UOMI) and penalties written off once core tax is paid if they were impacted by COVID-19. We then asked members whether they felt clients would be likely to make these eventual tax repayments.
Our concerns didn’t turn out to be true. The use of money interest (UOMI) relief COVID-19 response measures was a standout success – particularly compared to other jurisdictions. Our survey showed high levels of awareness, uptake and perceived usefulness of this measure. The remission of UOMI targeted those taxpayers who were likely to be viable but needed support through COVID-19. This targeting was based on the belief that a significant portion of businesses would still be able to meet their tax payments.
Our results found businesses used this relief measure for a wide range of tax types – reflecting a need to bridge funding as provisional and terminal tax dates fell amid the COVID-19 chaos. But more importantly, our results suggest the ‘gambles paid off’. Allowing taxpayers to defer their tax obligations hasn’t led to an abuse of the system and the majority of members in public practice felt their clients were very or extremely likely to repay in full.
The results of our survey reinforce our earlier questioning of Inland Revenue on the trends in tax debt and instalment arrangements. While tax debt spiked initially as a result of COVID-19, it is tracking better than we anticipated, and additionally the length of instalment arrangements on average is manageable – just over 13 months in August 2020.
Our results suggest the ‘gambles paid off’. Allowing taxpayers to defer their tax obligations hasn’t led to an abuse of the system and the majority of members in public practice felt their clients were very or extremely likely to repay in full.
What we found
One of our hopes for this survey was to help Government make informed decisions about future tax policy and COVID-19 response measures.
From our results there is one very clear opportunity for improvement. A temporary tax loss carry-back scheme was introduced earlier this year, and a permanent measure has been signalled. A loss carry-back scheme was a suggestion we heard regularly from members in March as initiatives were percolating – so why did so few respondents say they (or their clients) had used the scheme? And even fewer thought the scheme was useful?
Firstly, the timing was all wrong. COVID-19 hit New Zealand at the end of the financial year for most taxpayers, and after the summer season for our tourism dependent sectors. In short, many taxpayers wouldn’t have had losses to carry back.
Secondly, respondents stressed the risk of estimating future tax positions in what has been an unusually uncertain year and the complexity of the rules.
While significant factors, these first two points are largely beyond the control of policy makers. However, the last theme can be resolved.
Finally, respondents told us about the reality for many small businesses. Small businesses often make shareholder distributions, meaning there are no losses left in the business to carry-back. Small businesses (and the families behind them) also run on tight budgets, often week to week.
The temporary loss carry-back scheme has not been a success for those small businesses it was aimed towards. If Government is serious about assisting the SME sector a pragmatic solution is required, otherwise the permanent measure will meet the same fate. The issue of shareholder salaries will need to be resolved in a way that acknowledges practical business realities.
Ask and you shall receive…
We asked what one tax measure would most assist in responding to COVID-19. One suggestion struck us as surprising. Many respondents suggested a measure to allow businesses continued access to safe harbour provisions for their provisional tax.
Following the initial use of money interest relief announcements, CA ANZ went to Inland Revenue seeking a concessionary provisional tax treatment for SME’s in the 2021 income year to do just this. This resulted in temporary legislation allowing taxpayers to continue using their favoured uplift method to make provisional tax payments based on expected revenue without interest penalty.
CA ANZ ran a webinar in August with presenters from Inland Revenue outlining how this measure operates. If you or your clients are concerned about losing access to the safe harbour due to underpayment of the tax otherwise due – the link to the recorded session is below.
Some policy initiatives performed well, but what about Inland Revenue?
We assessed Inland Revenue’s performance on four metrics: responsiveness, consistency, helpfulness and understanding of the issue. The results from members in public practice was overwhelmingly positive more than half of respondents rated Inland Revenue’s services during COVID-19 as ‘excellent’ or ‘good’ across all metrics. We then measured the services of Inland Revenue Agent Account Managers against the same four metrics and saw consistent results. One member went as far as to say, “Our account manager came to the fore with COVID-19, we couldn't have rated her support any higher.”
Our results tell us that while MyIR and online services are useful, there are some situations that can’t be resolved without a personal touch. A significant pain point for members was the limited tax agent phone line service during COVID-19. During the Tax Conference, the Commissioner of Inland Revenue provided some context for why the limited service was necessary. However, we are pleased Inland Revenue have since acknowledged that not everything can be dealt with online and the tax agent’s phone service has since been reinstated full time.
Tax Management New Zealand
2021 Provisional Tax: Options during COVID-19
You can access the recording of the COVID-19 Sharing Knowledge Webinar SessionFind out more