NZ: Budget - Opinion

Mark Hubbard's picture
Submitted by Mark Hubbard on Fri, 2010-05-21 00:08

From my client e-letter this morning:

I know there are many accolades for yesterday's budget, but it only gets 2 out of 10 from me. (Though you knew that, didn't you).

Firstly, regarding the details of coming tax changes [snip ... the technical stuff].

Regarding my opinion on the budget (because I've been asked for it Smiling ) the first email I sent around yesterday said:

And before the budget is even announced, consider the logic. The government is still borrowing a quarter of a billion dollars per week to pay for our huge state sector (that's a billion a month). The lips of the relevant ministers are saying we'll all be better off after the budget, implying overall tax cuts. Again, despite lip service, no significant measures have been taken to reduce the size of the state (NZ currently has 1.75 million people in the private sector responsible - alongside corporates, trusts, and overseas entities paying tax in NZ - paying the wages and benefits of 1.75 million state workers, beneficiaries and retirees: that's one for one. Put all these facts together and you see that the government must be heading for an overall increase in the tax take if they ever want to balance the books in the future? [Relying on increased productivity to do this would be foolish in light of the sovereign debt problem in the northern hemisphere.]

Nothing in that logic has changed on the budget now being announced. Yesterdays budget appropriations increased the size of the State by up to 9% - that's the single most important fact from yesterday (remembering the government is already borrowing a billion dollars a month). According to Bill English the 'deficit' will be bridged from growth -hence more tax on more profits - fostered by the lower personal and company tax rates in his budget. I don't see how that works. You get a bit of personal and corporate tax benefit, but you're paying higher GST, higher ACC, higher excise taxes (from fuel to alcohol), and from 1 July higher energy charges from the (idiot) implementation of NZ's ETS. Some of my clients in the commercial property sector are a lot worse off due to the inability to claim depreciation on their buildings from next year (which 'do' depreciate) and will be paying a lot more tax from next year, regardless of the decreases in headline tax rates. This attack on the commercial property sector will flow through to higher commercial rents (malls, CBD's, office space, warehousing - that will increase the cost of doing business for all of us. Also, regarding the 'growth dividend' I don't see that as realistic in face of the sovereign debt problems in the northern hemisphere - even as I write this global share markets have had a bad night, all down, and the prospect of a double dip recession is becoming more talked about - the first part of the credit crunch in 2008 was private companies going down and being (inappropriately) bailed out by governments, the second leg of the credit crunch is some of those same governments/countries going down and being bailed out by other countries; hence, a German taxpayer now has to pay tax to cover government largesse in Greece [it's a funny old, unjust, world].

And there were a couple of other stings in the tail of the budget, other than the loss of depreciation on buildings:

The change to the LAQC rules is going to be a nightmare for many of you with LAQC's, especially in the dairy sector (given the issues of tainted capital gains [per my email yesterday] I won't in all cases simply be able to elect your companies out of that regime. I will work through all these issues with affected clients over the coming year (the changes don't kick in until next year).

That budget has put an additional $120 million into IRD audit, particularly to audit property transactions. There is going to be a huge increase in audit activity which is very expensive - forget the tax, in professional fees and time - if you're the one under the telescope. If you come up for a full audit, you may as well burn any personal tax benefit you might have otherwise gained for the next two or three years Smiling

And thus to end this email: issues from any budget aren't just about tax changes, they're about philosophy (philosophy, politics, economics can never be separated). Therefore, to the tail-piece, so to speak, of this e-letter, in the form of a rant [which is taken from an email correspondence I'm having with someone else, so please forgive me for context from time to time, and repetition with the above]:

Bill English says he is constraining government, but the appropriations from this budget grows government, again - by 9% this time. Without slashing the size of the state none of this adds up, and no one is 'net' better off: you might have a few more dollars in your pocket - debatable with all the tax increases outside the headline rates and the ETS - but with an additional $120 million pumped into IRD audit we’ve all lost more of our privacy, we are all more beholden for our lives to bureaucrats (**), we are all much, much less free.

Living in a free society is not a simple matter of money or tax policy it's about the reach a government has into the minute details of your life and just how much it can scare the hell out of you, and threaten your livelihood.

Big and unfair anomalies in our tax system have not been addressed.The changing and still continuing tax rate differences between companies and individuals continues the compliance nightmare – the hassles of managing imputation accounts, multi-rate FBT calculations, continuing court cases over the salaries paid from companies – where IRD is well on the way to telling ‘you’ how much you earn from your own company [they are actually developing a database of what you are deemed to have earned - to pay tax on - given industry, etc. George Orwell didn't even envisage that in his dystopia, '1984', or in 'Animal Farm']. (Ahem, I have always dealt with the salary issue conservatively, because the IRD penalty system wakes me at four in the morning with panic attacks.)

The attack on LAQC’s will be a disaster for the many industries which legitimately use LAQC’s and that have no links to the property industry (which has been given as justification for the attack). The flow through of profits to shareholders means the LAQC and QC is effectively dead (it's a limited partnership now), but there will be some compliance nightmares in extricating from them (and for many situations where the use of a LAQC created a fairer situation for the business, via the ability to distribute tax exempt capital dividends, there is no longer a ‘fair’ solution).

(**) And getting back to that $120 million to IRD audit, specifically aimed at property transactions: wouldn't it have been nice if government had clarified the rules of what was taxable and what was not on property sales. In many cases this is an entirely subjective decision, especially around intention, and the taxpayer has to continue having a limitless pot of their own money used against them in the court system. Nothing has been done to change this. (Ahemming again, where I have not be able to steer clear of the property sector, my overriding treatment is conservative here also - just in case an IRD officer happens to be reading Eye To be honest, I have tried to avoid this sector due to the tax laws being so complex, vague and open ended. )

A tax system which is not transparent, where taxpayers in many instances cannot know their position before the law - where binding rulings are slow and expensive, and as the banks have found out, often useless - but those same taxpayers are punished harshly when they are deemed to have got it wrong, such a system is one that promotes fear, not freedom.

There, that's my opinion Smiling

Statement of conflict of interest: will any political party currently sitting in parliament ever produce a budget I would be philosophically happy with? Answer: NO.

Cheers Mark

PS: if you want to see how farcical the ETS is going to be, read 'all' of this: http://www.nbr.co.nz/article/b...


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Follow up - The Attack on LAQC's an Own Goal for a Farmer Govt.

Mark Hubbard's picture

[These are just some notes I'm putting together for a submission on the new LAQC rules, and also to send to the related Morons (well earned title in this instance) of Parliament.]

I've been looking at the implications of the budget changes for LAQC's, well summarised on the Taxypolicy site and here:

http://www.netprophet.co.nz/ne...

I have quite a number of LAQC's on my books, the irony is not one of them is a rental property company. The most nightmarish part of the new rules will be these:

There will be a deemed disposition and reacquisition at market value of the company's assets when the company ceases to be a QC. The shareholder will therefore be required to account for tax on the disposal of their share of the QC's property. On liquidation of a QC a shareholder of a QC will be treated as having disposed of and reacquired all of their interest in the company at market value. The QC will be required to file an IR 7 partnership income tax return.

It's so farcical. Many of the clients I have in LAQC's were incorporated into this structure just to avoid this problem of the partnership (especially for ma and pa farming couples, and especially to avoid a big tax bill on the death of a spouse in a farming partnership when all livestock were revalued; livestock being the biggest of the problems here, then depreciation recovered). Further, in many instances the farms were not making enough profit in some years to cover owner drawings, so LAQC's were a perfect solution to FBT payable on overdrawn shareholder current accounts. All that is gone now and we are back to all the problems that existed pre the QC regime (for which the QC and LAQC regime were instituted in the first instance).

I will try and elect out of most client LAQC's before the advent of the new rules which start 1 April 2011. In this way I will revert the LAQC's to standard companies, with none of the taxation penalties that will be implemented by the new horror rules, while straddling affected clients in all business types with the problems of non-QC companies.

But there are some very large problems even in doing this.

For those where electing out of the regime now will mean losing imputation credits (because they will go back to any pre-shareholder threshold breach balance of the normal company rules), I shall first have to distribute dividends to clear out imputation accounts (and - especially tainted - capital reserves).... only there is a fatal flaw here. An LAQC election revocation goes back to the start of the tax year,this means all such companies will be caught out by timing. Ie, if I distribute dividends over this year, then I can't elect out until the next financial year, but that will see every company caught out on the new idiot and very costly rules. That will be financially untenable for many existing LAQC and QC's. Considering the tax cost the previous (in many instances) partnerships undertook to incorporate in the first instance, it is now unconceivable that they revert back to partnerships with all the same problems back, and the cost all over again on the death of a spouse (again, I'm talking the old, clumsy farming partnership), and on farm succession issues - this is a nightmare, and an outright disaster. At least there should be a five year lead in to the transition so that existing LAQC's have the opportunity to suitably prepare for such a radical change.

This also means there is no way out from a non-QC company's problems with tainted capital gains. It is unacceptable that a government do away with LAQCs and QC's while not addressing the myriad of injustices surrounding tainted capital gains.

I wonder if the government realise that in this supposed attack on property, the sector that is going to be worse hit, I suspect, will be dairy, and then the farm sector in general. Further, given the tainted capital gains problem, and the fact many 'good' dairy landowers help their sharemilkers into farm properties (ie, up the ladder), and for that matter into herds (given that the tainted capital gains issue also captures gains under the Herd Scheme) by entering into new companies with them to allow the financing of the farm normally purchased from the existing landowner, then this attack on LAQC's will now represent a big impediment to sharemilkers being able to improve themselves.

I won't give you my continuing opinion on ill-informed politicians, ill-conceived ad-hoc policy making, and an idiot public supported by moronic mainstream economists and media baying for the destruction of a truly important business structure used across all business sectors, in order to attack just the single sector.

For this government to have achieved its policy objectives, all it needed to do was ring fence domestic property rental losses no matter what the structure they were generated in. Instead, it has instituted this unjust, costly, bureaucratic and compliance nightmare on all sectors. The stupidity of it is nothing short of stunning. The injustices caused by this utterly shameful. And the sector that will be amongst the highest inconvenienced will be the rural sector. With this attack on QC and LAQC's, and the coming pointless ETS, it can only be assumed that National believes it has now won-over the state and beneficiary sectors - the only sectors they seem intent on growing - and they no longer need the farmer vote.

.... who is advising a 'farmers' government this badly?

Most email apps..

Ross Elliot's picture

...have an option not to send immediately but to wait until you issue a send receive command.

But then we'd have people asking for a delay on the delay on the delay.

Check twice, send once.

Eye

If you use Gmail, you can

Luke H's picture

If you use Gmail, you can turn on a 'cancel' button which works for 5 seconds after you have clicked 'Send'. Very useful.

I often find myself looking

reed's picture

I often find myself looking for an "unsend" button for the same reason.

[Wish I hadn't sent it out

Mark Hubbard's picture

[Wish I hadn't sent it out with quite so many grammatical errors.]

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