Briefly in Aotearoa’s political economy around housing, poverty and climate on Friday Thursday, December 5:

* Treasury released Crown Accounts for the first four months of the financial year yesterday that showed the Budget deficit was $704 million worse than forecast in May at $4.94 billion, largely due to lower than forecast tax revenues because of this year’s economic contraction.

* However, the Government’s cash needs were $802 million lower than forecast because of lower-than-forecast capital expenditure.

* Under instructions to raise as much cash as possible, the IRD quietly announced a proposal last night to start taxing company loans over the value of $50,000 to shareholders as dividends after a year. The loans by 119,000 companies, about 16% of all of New Zealand’s companies, are to 165,000 shareholders and were worth $29 billion at the end of March 2024. It has yet to be approved by Cabinet and would apply to loans made from yesterday.

* The Government yesterday rejected all of the Climate Commission’s advice on meeting its 2050 targets. (See links below and in Friday’s Early Bird)

* Commerce Commission Chair John Small has declared the electricity system a market failure. (See links below and in Friday’s Early Bird)

* Transport Minister Chris Bishop has suggested their may be less need for the Government’s $56 billion Roads of National Significance (RONS) programme if congestion charging reduces demand for more motorways. (See links below and in Friday’s Early Bird)

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The Lead: IRD to dig out more tax from SMEs

The Government is now in spiral of having to crack down on overdue and unpaid taxes from small businesses in order to make up the lost tax revenues from budget cuts to capital expenditure on construction and infrastructure.

The irony and unintended consequence is the very act of clawing back more tax from small business owners is it often pushes them into liquidation and the owners into bankruptcy, in part because the usual pool of ever-rising equity in those small business owners’ homes hasn’t risen in the last two years.

This spiralling pressure on the Government to get more revenue to make up for slower than expected income tax and GST revenues was evident in yesterday’s Crown Accounts, which showed lower than forecast tax revenues widened the Budget Deficit for the first four months of the current financial year to June 30, 2026 by $704 million more than expected to $4.94 billion. It’s also $1 billion higher than a year ago.

Despite that, the Government’s cash deficit and borrowing requirement was $802 million less than expected because of delays to capital expenditure. This also adds to the downward spiral in revenues as more construction firms are liquidated, thanks to less Government work than expected. Here’s Treasury’s explanation:

“The core Crown residual cash deficit of $3.7 billion was $0.8 billion smaller than forecast, mainly due to lower than forecast net core Crown capital cash outflows ($2.2 billion), offset in part by higher than forecast net core Crown operating cash outflows ($1.3 billion). The lower than forecast net core Crown capital outflows was owing to lower than forecast net advances and net purchase of investments with othe government agencies.” Treasury in the Crown Accounts for the four months to the end of October.

IRD tips over small firms and finds unpaid loans to shareholders

The other irony, perhaps, is that it is tax collection arm of the Government, IRD, that is often the one tipping these companies over.

Now the IRD has seen an opportunity to raise more funds, in part because many of these companies being liquidated are owed billions by their owner-operators, who have ‘lent’ money from their companies to themselves, partly, the IRD says, because it might reduce their tax bills.

That was clear in the IRD’s proposal last night to start taxing those loans to shareholders as a dividend if they’re not repaid within a year and are over $50,000. This may seem an obscure thing, but the numbers are currently huge. The IRD has said the new tax treatment would only apply from yesterday, if agreed by Cabinet, but as of March 31, 2024, there was $29 billion owed to 119,000 companies, 16% of all New Zealand’s companies, by 165,000 shareholders.

Here’s the IRD explanation (bolding mine):

“When a shareholder borrows a large amount from their company and does not promptly pay it back, they can pay less tax compared to shareholders in other companies who receive taxable dividends or taxpayers who earn income as sole traders, partners or salaries. This is because when shareholders receive dividends and other payments from their companies, the funds are fully taxed at the shareholder’s marginal rate (up to 39%). In contrast, when a shareholder receives funds from their company in the form of a loan, the company will often only be required to pay a small amount of tax on the loan interest each year.

“In addition, Inland Revenue is concerned the current rules often fail to collect tax on the funds left in the hands of the shareholder when a company is wound up. This is because the rules do not provide a clear date for when income arises on outstanding loans when the lending company is removed from the Companies Register.

“Inland Revenue is concerned that the way shareholder loans are taxed, together with the differences in tax rates, means that the current tax system provides an unintended tax advantage when companies lend funds to shareholders, compared with paying taxable dividends.” IRD consultation paper.

IRD is also worried that size and number of these loans has been rising faster than taxable income, and the tax base generally. It points out Australia, the UK and Canada don’t leave these loans lightly taxed.

“We are concerned that the high value of shareholder loans suggests that our current rules relating to shareholder loans are less effective than rules in other jurisdictions at requiring the loan be repaid within a certain period of time or before the company goes out of existence. This can result in the tax advantage becoming a permanent advantage for the shareholder if the loan is never repaid.

“Inland Revenue data also shows that over a six-year period from 1 April 2019 to early 2025 nearly 15% of all companies removed from the Companies Register were owed money by their shareholders at the time they were removed. In aggregate, those companies were owed over $2 billion by their shareholders.” IRD consultation paper

IRD argues the new rules would encourage repayment and ensure IRD gets more in liquidation situation.

“We expect that, if implemented, the measures in this issues paper would encourage the timely repayment of shareholder loans and reduce the use of long-term company loans to shareholders. This is expected to increase the funds available to a company to invest in its business.

“It may also reduce the likelihood of a liquidation and could potentially increase the amount that can be used to pay Inland Revenue and other creditors if a liquidation occurs.” IRD consultation paper

IRD doesn’t say how much extra it could raise, but a conservative estimate would be in the hundreds of millions. Regardless, if approved by Cabinet, it will add extra cashflow pressure on SMEs, a constituency the Government may not want to alienate.

The Daily Chart Pack

In the political economy: IRD sees an opportunity…

…in the much faster growth of loans than taxable income....

…especially by landlords, real estate agents and farmers.

In the economy…building work improved a bit, but is still down on 2023

…which has lifted liquidations to a 14-year-high, triggered mostly by IRD.

My Pick n’ Mix of links elsewhere

* Tom Pullar-Strecker for The Post-$: Return to surplus at risk unless operating allowance is cut – ANZ ‘Treasury accounts show continued deterioration in “Obegal” balance from the Budget forecast, ahead of Half Year Economic and Fiscal Update.’

* Sam Smith for Stuff: A generational split emerges within National on house prices

* Op-Ed by Vic Uni Political Science lecturer Luke Oldfield for The Post-$: How Chris Bishop is trying to turn the Kiwi dream into a support base. ‘The promise of property ownership will be a necessary plank in how any government is to win elections in the years to come.’

* Op-Ed by Phil Goff for NZ Herald-$: Why a rates cap isn’t the answer for local Government ‘The CRL deal left Aucklanders paying billions in costs other Kiwis don’t face.’

* Sharon Bretkelly for RNZ/Newsroom’s The Detail: Finish line in sight for the City Rail Link ‘The opening has been pushed back again, the price is extraordinary, but Auckland’s City Rail Link is expected to deliver the region the wow factor.’

See more in today’s Early Bird post.

Cartoon: Tell them they’re dreamin’

Timeline-cleansing nature pic:

Ka kite ano

Bernard

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