A Week in Review

TWG Terms of Reference
While it certainly received plenty of media attention, in case you did not hear it, the terms of reference for the Tax Working Group were made public, as was the fact that Sir Michael Cullen was to be the TWG’s chair.
Outside the scope of the TWG review, are any increase to the rates of income tax, the GST rate, an inheritance tax or any taxation that would apply to the family home or the land beneath it.
The TWG is however to focus on the apparent present unfairness of the tax system (a subjective view I would suggest, depending upon which fencepost one is sitting on), and what changes can be implemented to bring more balance and equity to the table.
Clearly the narrative of the media release singles out income from land transactions, or perhaps more correctly, the lack of it in speculator type scenarios, as leading the way in creating an unbalanced tax system, particularly when compared to the way income from work is taxed.

I would beg to differ however. Presently there is a robust set of provisions in the income tax legislation, recently strengthened by the 2015 introduction of the bright-line rule (itself already under fire by the new Government to increase the automatic taxation period from 2 years to 5), specifically aimed at ensuring gains from the disposal of land are subject to taxation in numerous situations. Acquire a piece of land with the purpose or intention of resale, to use the words of the Minister’s themselves – “income from speculation in housing”, and it is taxable whenever sold. Certainly there are difficulties in this respect in determining the taxpayers subjective “purpose or intention” at acquisition date, which one could argue could be problematic for the Commissioner if the onus was on her to prove the case, however this is not so (onus resting with the taxpayer), and she is now further assisted by any sale of residential land within a two year period being automatically subject to tax.
Sure a taxpayer can attempt to claim a personal residence or main home exemption from taxation under these various provisions, however carve-outs are already in place to deal with “transaction patterns” and one often forgets that IR always has the benefit of hindsight, coupled with extremely wide information gathering powers – so if you’re going to do it, ignore the urge to tell anyone else about it, as chances are, that innocent conversation may one day come back to bite you.
With that reflection from the writer now in mind, I would suggest that perhaps rather than using the phrase “at the moment the tax system appears unfair”, the Ministers could have instead directed the reader’s
attention to the need to improve the methods for identifying and collecting tax potentially already payable under existing provisions, which would not only then focus on the property market (which is clearly one close to most voters hearts), but to more wider concerns as well for IR (and therefore Government), such as the cash economy.

As always with these reviews, the ultimate proof will be in the taste of the pudding, so watch this space to see what develops, when final recommendations are made to the Ministers in February 2019 (yes it’s not a typo – like the Pike River re-entry review – the outcome is over a year away still!). Any significant legislative changes will then not come into force until the 2021 tax year.
In the coming weeks we will find out the other members of the TWG – a diverse range of tax and finance experts and representatives of the business and wider community.
Finally, there is a tinge of Green in the TWG terms of reference, the review to also focus on how the tax system can contribute to positive environmental outcomes and the impact of likely changes to the economic environment, demographics, technology and employment practices over the next decade.

There really is no helping some people….
I thought I would share a case decision I have just read, as it again brought home to me the age old understanding of there just being a certain group within the taxpayer community, who just can’t help themselves….
So enter the taxpayers, husband and wife, whose accountant was advised by IR in 2008, his clients were suspected of being involved in undisclosed property transactions, so perhaps they should file voluntary disclosures.
Naturally, as most prudent individuals would, knowing the game was finally up, voluntary disclosures were filed in respect of 16 buy/sell transactions over the October 2002 to March 2004 period. Good that they had taken the opportunity to come clean right?
Wrong – there was actually 40 undisclosed such transactions over the 2003 to 2007 income years (one wonders how many of those they tried to claim the personal residence exclusion for). Ok, so now IR has you for not only failure to disclose, but when actually provided with an opportunity to come clean, failure to make a full disclosure of all known events.
The audit was eventually finalised in November 2009, assessments for all outstanding taxes now having been issued.

Enter the IR collections team. Initially the taxpayer’s accountant offered a full and final settlement payment of $150k (on a debt exceeding $1.1m). The arrangement never proceeded however and judgement for the debts was obtained against the taxpayers in February 2011. Bankruptcy proceedings were commenced early 2012, but later withdrawn by IR, late 2012, to consider further documentation from the taxpayer (still no payments toward the debt made).
A formal relief application was made by the accountant in January 2014, IR countered offering to accept circa $650k and write-off the balance of the $1.75m debt (still no payments made and now some 4 years post assessments). Second formal relief application made late 2014 – now full and final offer reduced to $30k due
to “deteriorating financial position”. Third formal offer made January 2015 and fourth in March 2015. All declined by IR and bankruptcy proceedings now back on schedule (still no payments made).
The taxpayer’s then got the High Court involved in May 2015, seeking a judicial review of IR’s decision. Also sought an order requiring IR to reconsider decision, which IR actually agreed to do, therefore vacating the need for a hearing (still no payments and over 5 years now). The IR review was completed March 2016, recommending bankruptcy was the only course of action – a decision agreed with by the reviewer’s team leader and then the Collections manager.
The taxpayers were naturally dissatisfied with the outcome and commenced further judicial review proceedings which were dismissed by the Judge. The matter was then appealed to the Court of Appeal, who released its decision November 2017. Now over 10 years since the income year in which the last transaction occurred, still no payments made. Court of Appeal dismissed the appeal.
It is without surprise that one finding of the Court of Appeal was that not only had the taxpayers failed to meet their tax obligations, they also failed to take advantage of the many opportunities afforded to them by IR over a five-year period to provide proper and complete disclosure to support their repeated applications for financial relief. In this respect was notably a comment:
“the taxpayer had failed to overcome the overriding concern that they had not satisfactorily explained how they were meeting their living expenses based on their declared income. Further, none of the bank records provided evidenced the spending on basic living expenses necessary for a family of four adults. Even taking into account the mortgage arrears, the information provided suggested that the taxpayers must have been paying their other living expenses from undeclared income.
Watch this space for an appeal to the Supreme Court, but as I said at the outset, some people simply cannot be helped and that there really are times in life to say “when”.
I hope they at least paid their accountant.
Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected] Ph: +64 9 365 5532 Fx: +64 9 309 5260 Mb: +64 21 823 464