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Speaker: Why we can’t just fix secondary tax

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  • Rich of Observationz,

    Having zero or multiple GST rates is not a big problem. Most people filing accounts in NZ will already have some zero GST inputs, such as bank charges and low value imports (like web hosting and so on). And supermarket systems are sufficiently complex that adding zero rating would be a fairly small percentage of the total - they already need to account for dozens of different supplier discount schemes and pricing models.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • izogi, in reply to Rich of Observationz,

    That’s completely true, and it’s not that tough to handle when you’re already handling so much complexity. I think my fascination is more with how much stuff is now being classified as ‘fresh food’ – it’s the classifying more than the different tax rates. We commonly had $250 shops that might have included $1 GST, and that was on something like washing powder. It’s just another exception which can be strongly taken advantage of by those who know the tax system, and thus it’s great for supermarkets because it plays into their ability to know exactly what they can get away with, but those who don’t are at a disadvantage. But even personal tax accountants are extremely common in Australia because the personal tax system is an order of magnitude more complex. Adding more exceptions to the personal tax system (like a tax discount on the cost of hiring a personal tax accountant) is good politically and irritates fewer people, because they’re already paying someone else to care. But overall I think there’s a much lower efficiency with people’s time because it's being eaten up in bureaucracy.

    Wellington • Since Jan 2007 • 1139 posts Report Reply

  • Matthew Poole, in reply to Rich of Observationz,

    As izogi says, it's not that it's hard to have zero-rated GST on some products, it's that the definition of what's zero-rated is devilishly complex and ripe for rorting. GST is the most-contested part of our tax system despite its simplicity, and introducing ground for very grey areas just means that will become even more true.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • Matthew Poole, in reply to izogi,

    like a tax discount on the cost of hiring a personal tax accountant

    You mean like the 100% deduction of the cost of a third-party's help in preparing an income tax return? That kind of discount?

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • izogi, in reply to Matthew Poole,

    Got me there.

    Wellington • Since Jan 2007 • 1139 posts Report Reply

  • Deborah, in reply to Matthew Poole,

    If you pay for someone to do your tax return, then the expense reduces your total income, but the tax effect is only at your marginal tax rate.

    So, imagine you earn more than $70,000 a year, so you're on the top tax rate of 33% for every dollar in excess of $70,000. Let's say you earn $100,000 a year. The tax on $100,000 is $23,920 (trust me).

    But, let's say you pay someone $1,000 to do your tax return for you. The expense can be claimed as a deduction against your income. So now your income is $99,000. The tax on $99,000 is $23,590.

    You've spent $1,000, and you've reduced your tax bill by $330. You've spent $1,000, and you will get $330 back (in reduced cost), so the overall effect is that you are worse off by $670.

    That's the standard rule for any deductible expense. The expense reduces your income by $whatever, and that in turn reduces your tax bill by $whatever x your personal top tax rate.

    So yes, you get a 100% deduction for the cost of a third person's help in preparing your tax return, but the tax effect is at most equivalent to one third of the expense.

    New Lynn • Since Nov 2006 • 1445 posts Report Reply

  • steven crawford, in reply to Deborah,

    So yes, you get a 100% deduction for the cost of a third person’s help in preparing your tax return, but the tax effect is at most equivalent to one third of the expense.

    Minus GST:)

    Atlantis • Since Nov 2006 • 4310 posts Report Reply

  • izogi, in reply to Deborah,

    I haven’t double-checked the NZ rules but I’m assuming Matthew’s point is that I’d given that deduction as a throwaway example of complexity in Australia’s income tax, but that the same deduction is available in NZ (and I should have used the word ‘deduction’). I agree that it still costs the $670, or whatever it adds to for an income. :) Even if it was a complete 100% refund to the individual, money’s still being channeled to accountants to handle the complexity of a tax system so it’s arguably not ideal unless you’re in the business. I’m all for reduced complexity where possible.

    Wellington • Since Jan 2007 • 1139 posts Report Reply

  • Lilith __,

    My beef with secondary tax is how it relates to couples. If one spouse is non-earning, and the other spouse has 2 jobs, the household pays significantly more tax than if both spouses are earning.

    Dunedin • Since Jul 2010 • 3887 posts Report Reply

  • Ian Dalziel,

    I earn so little these days (self-employed) I am thinking of deregistering from GST, but always figured it created a headache for clients then having to sort out the invoices they pay from people that include GST and those from people that don’t – another tier to the calculations – does anyone know if that is the case?

    Most bills I pay have GST on them…
    …which reminds me GST is due tomorrow!

    Deborah’s explanation of secondary tax also helps me see Kiwisaver (and David Parker’s recent suggested changes) as a down payment on retirement – which helps – I should join…

    Christchurch • Since Dec 2006 • 7887 posts Report Reply

  • Deborah, in reply to izogi,

    Even if it was a complete 100% refund to the individual, money’s still being channeled to accountants to handle the complexity of a tax system so it’s arguably not ideal unless you’re in the business. I’m all for reduced complexity where possible.

    Yes, indeed. I've found that I can do my tax return in NZ and get it right, every time (as you'd hope, given that I lecture in tax). But when we lived in Australia, I would do our tax returns, send them off to the ATO, and find that they would come back with changes.

    If a reasonably competent person has to pay an expert in order to deal with a government department, then that suggests that there may be something wrong. Tax *is* complex, and perhaps it's not possible to reduce its complexity to the point where everyone can just do their own tax returns with comparative ease. Even so, if se started to find that everyone had to hire experts in order to do an ordinary tax return, then we might be wanting to conduct a major review of the way we do tax.

    New Lynn • Since Nov 2006 • 1445 posts Report Reply

  • steven crawford, in reply to Ian Dalziel,

    Deborah’s explanation of secondary tax also helps me see Kiwisaver (and David Parker’s recent suggested changes) as a down payment on retirement – which helps – I should join…

    You should! kiwi bank makes it easy, as a one stop shop.

    I already have enough saved, so that I can build an exoskeleton.

    Atlantis • Since Nov 2006 • 4310 posts Report Reply

  • Matthew Poole, in reply to Lilith __,

    My beef with secondary tax is how it relates to couples. If one spouse is non-earning, and the other spouse has 2 jobs, the household pays significantly more tax than if both spouses are earning.

    That's the fault of a lack of income splitting rather than the fault of secondary tax. Sure it'd still be a hefty loss up-front, but if the sole income could be split within the relationship there'd be a healthy refund at the end of the tax year.

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • Paul Campbell,

    I lived in the US for 20 years, I still have to file returns there - this is very much a case of "you don't know how lucky you are mate" - NZ tax is so so easy - I used to file 150 page US returns

    I've run a small business in California, it's a nightmare, especially sales tax, not only are some things taxed and some not, but each city has its own tax rate - sell stuff by mail and you have to know where you are shipping stuff to and look up the tables ..... by comparison GST is trivial, attaches to everything, my NZ company's returns take 5 minutes every 2 months (most of it spent trying to remember the bizarre fraction I have to multiply by) .... and then the IRD sends me a cheque (because most of my company's income is from the export of my labour, and exports don't charge GST) - equally PAYE in NZ is easy, it's a row in a spreadsheet (half of that kiwisaver) takes 5 minutes a month - again we don't know how propitious are the circumstances .

    Dunedin • Since Nov 2006 • 2605 posts Report Reply

  • Paul Campbell,

    Oh yeah and I'm all for income splitting (or joint tax returns) - but it's a largely middle class tax break, it doesn't help the low income couple who both have to work hard to get by. I think we should bring it in, but bump the upper bracket enough to make the result revenue neutral.

    My wife's and my assets are all community property (we lived in California where all marital property is that) - dealing with tax on income from investments in the US that has to be paid in NZ is, well, interesting - I don't see why married couples couldn't file jointly (you have to change where the tax rate steps kick in for those who do that) it would make life a lot easier - our marginal rates are currently different - how we deal with jointly owned interest bearing accounts is just weird, you can't tell the bank to pay half the tax on interest earned at one rate and the other half at another

    Dunedin • Since Nov 2006 • 2605 posts Report Reply

  • Deborah,

    The joys of income splitting....

    People are often very keen on income splitting. But it's worth knowing the numbers around it. A couple of examples, one set at the level of the top tax threshold, and one set at a joint household income of $80,000.

    1) If one person earns $140,000, then she or he pays $37,120 income tax. If two people earn $70,000 each, then they each pay $14,020 tax, and between them, they pay $28,040 tax. That's a tax saving of $9,080 compared to the single income earner.

    2) If one person earns $80,000, then she or he pays $17,320 income tax. If that income is split between two people, with one of them earning say $60,000, and the other earning $20,000, then they pay $11,020 and $2,520 tax respectively, giving a total tax bill of $13,540, which yields a total tax saving of $3,780.

    Long story short: the benefits of income splitting flow disproportionately to high income earners, especially those households where one person is in a very high paid job, and the other person is very low paid or not in work at all. It's worth thinking about which sorts of people are likely to fit into that pattern (hint: it's not low paid workers in South Auckland).

    It gets even more complicated when you factor in Working for Families, which calculated on a family basis, and so in effect creates a form of income splitting already. Those calculations make my head hurt, which is why I've stuck with just the simple income tax calculations.

    New Lynn • Since Nov 2006 • 1445 posts Report Reply

  • Matthew Poole, in reply to Paul Campbell,

    GST is trivial, attaches to everything, my NZ company’s returns take 5 minutes every 2 months (most of it spent trying to remember the bizarre fraction I have to multiply by)

    File your GST returns online. Let the computer remember the "Mazda rule" (divide by 3 then multiply by 23, hence "Mazda rule").

    Auckland • Since Mar 2007 • 4097 posts Report Reply

  • izogi, in reply to Deborah,

    From a joint income angle, what's the current state of people doing things like paying a [fake] salary to their partner in New Zealand, so that both have a lower income and avoid the upper tax rates to pay lower income tax overall?

    I'm new as a sole trader and it's not something I do. It seems unethical if nothing else, but it's crossed my mind to wonder about it from a fairness perspective. Is it something that everyone does? Is it frowned upon? Is it completely illegal?

    My wife's from a farming family and wasn't eligible for a student allowance when in uni, but has many stories about friends whose parents arranged the company accounts to make themselves have a low enough income for their children's eligibility for allowances. It seems about the same level of ethical value if that can be measured.

    Wellington • Since Jan 2007 • 1139 posts Report Reply

  • Rich of Observationz, in reply to Matthew Poole,

    I have seen that 3/23 thing hardcoded into a large NZ enterprise's accounting system :headdesk:

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Paul Campbell, in reply to izogi,

    From a joint income angle, what's the current state of people doing things like paying a [fake] salary to their partner in New Zealand, so that both have a lower income and avoid the upper tax rates to pay lower income tax overall?

    my accountant originally suggested I do this (10 years ago), along with a bunch of other things that have since landed a bunch of Dentists/etc in deep trouble. I declined - however my company largely exists as a tax dodge - in a good way: so that I'm not directly an employee of a US company, and so as a result the bulk of my tax is paid in NZ (you should pay tax in the community where you live) - I still file and pay tax in both countries - it's not fun, but the NZ part is less not fun than the US part

    Dunedin • Since Nov 2006 • 2605 posts Report Reply

  • Paul Campbell,

    yes but dividing by 23, a prime number, it just seems wrong somehow

    Dunedin • Since Nov 2006 • 2605 posts Report Reply

  • izogi, in reply to Matthew Poole,

    I was very confused when I first saw the reference to that fraction everywhere through IRD's documentation, the first time I had to deal with GST. In my head I'd already had it figured out as just multiplying by 1.15 to add the 15% GST component or dividing by 1.15 to remove GST.

    Then I realised that 23/1.15=20, so I guess it all adds up nice and neatly. :)

    Wellington • Since Jan 2007 • 1139 posts Report Reply

  • izogi, in reply to Paul Campbell,

    my company largely exists as a tax dodge – in a good way: so that I’m not directly an employee of a US company, and so as a result the bulk of my tax is paid in NZ

    That's very similar to what I'm doing with Australia (but not as a company). Basically telecommuting to my old employer in Melbourne, but everyone on both sides decided it would be a tax nightmare, so I've basically set up here and I send them monthly zero-rated NZ$ invoices for my time.

    Fortunately Australia should no longer consider me a tax resident once I have this year sorted out, if I've understood all the dealings correctly, because I no longer live there. Without wanting to bag them too much, I can't wait to cut that cord and simplify everything to a level I can manage. And I'm more than happy for all my income tax to go to New Zealand rather than Australia.

    Are you a US citizen, Paul? I've heard that the USA makes its citizens file annual returns no matter where they are in the world... just to make sure they're paying enough tax to somebody. Or is this just something about doing business with a US company?

    Wellington • Since Jan 2007 • 1139 posts Report Reply

  • Deborah, in reply to izogi,

    It's illegal, izogi.

    Section DC 5 of the Income Tax Act 2007

    DC 5 Payments to spouses, civil union partners, or de facto partners: services
    No deduction without approval
    (1) A person is denied a deduction for a payment to their spouse, civil union partner, or de facto partner for services without the Commissioner’s approval.
    When Commissioner can give consent
    (2) The Commissioner may approve the deduction only if—
    (a) the Commissioner considers that the payment is for services rendered; and
    (b) the services are not domestic services or otherwise services connected with the home; and
    (c) the payment is incurred by the person exclusively in deriving their assessable income; and
    (d) the approval is granted before the deduction is claimed.

    In other words, you have to have a genuine reason for paying your spouse/civil union partner/partner, and you have to get permission from the Commissioner before you get to claim the deduction.

    Of course, you can still go ahead and pay your partner, and she / he will then have to pay taxes on it. But you can't claim the deduction, so it will still count as your income too, and you will have to pay income tax on it too. So it would be a very silly thing to do. As well as being unethical, as you say.

    Regarding student allowances and the like, my understanding is that the rules for claiming them have tightened up, so that income diverted through trusts or via income equalisation accounts gets added back into the mix for calculating student allowance entitlements. Study Link has a page on what gets counted as parental income: Parents' income - Student Allowance definition. The definition of parental income is pretty closely linked to the definition of income for Working for Families purposes, and that was tidied up a year or two ago to minimise the use of trusts and the like as a mechanism for getting for W4F credits.

    New Lynn • Since Nov 2006 • 1445 posts Report Reply

  • Paul Campbell, in reply to izogi,

    Are you a US citizen, Paul? I've heard that the USA makes its citizens file annual returns no matter where they are in the world... just to make sure they're paying enough tax to somebody. Or is this just something about doing business with a US company?

    No, but my wife is, I lived there for 20 years and have retirement investments there

    We have to file as a non-resident on the small income from those long term investments, it typically is small enough that I pay no or little tax in the US, then I pay tax in NZ at my marginal rate on the difference (because of the tax treaty) between how much I paid in tax in the US and my high marginal rate in NZ - this is IMHO entirely fair - however it's another case where not being able to file jointly in NZ (but have to in the US) makes it a nightmare for us because my wife is on a different marginal rate in NZ than I am ....

    Dunedin • Since Nov 2006 • 2605 posts Report Reply

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