MAKING TAX SIMPLER - BETTER ADMINISTRATION OF INDIVIDUALS' INCOME TAX

MAKING TAX SIMPLER - BETTER ADMINISTRATION OF INDIVIDUALS' INCOME TAX

A consultation document was released 19th June 2017 — Better administration of individuals’ income tax — by the New Zealand Government. It is seeking feedback on a package of proposals that would (apparently) make tax simpler for those who are on salary and wages, or only have tax paid interest income.

A short history lesson. In 2015 the Government released a consultation paper called Making Tax Simpler: A Government Green Paper on tax administration which included proposals that all taxpayers would have to confirm their tax position annually (on-line). The Better Administration of PAYE and GST (November 2015) and the Investment Income Information (July 2016) discussion documents contained proposals to require income payers (employers, banks, companies etc) to provide more information, more often to Inland Revenue about who they paid. Changes to legislation as a result of the proposals in those two last documents are contained in the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Bill, which is currently before Parliament. 

A discussion document called Making tax easier was released for public consultation in June 2010. One item, which created controversy, was an idea to treat PAYE as a “final tax”, so there was no refund for overtaxing and no tax to pay for under taxing. In theory salary and wage earners should pay the correct tax annually, but for a significant minority this is not the case for various reasons such as increased or decreased salary during the year, second jobs, part year working. In part this proposal was due to the concern that some taxpayers were claiming refunds in credit years, but not paying tax in the shortfall years.  A situation brought about by the legislative changes in the late 1990's, which reduced the number of taxpayers (salary and wage earners, and interest earners) who had to file returns. The promise was that 'you don't have to file because we have the information and will send you a refund if it is due.' Over the years this has patently not been true and a number of enterprising firms have set up tax return filing systems to claim those missing millions on behalf of their clients where a refund was owing, but the Revenue had not paid it. 

The Govenment has now backed off from an annual tax confirmation for all taxpayers (the impact would have been a significant increase in the workload for the Inland Revenue, even with new technologies). Instead it is proposing processing and calculating income and tax on specific data collection in 'real time', checking against prior years to capture and remind taxpayers of potential income to be disclosed, and allowing donation claims electronically during the year, amongst other changes. In conjunction with this there is a proposal to shed some 1,500 jobs at the Revenue by using more automation and data analytics.

The closing date for submissions is 28 July 2017, with a proposal to have any changes introduced into Parliament in the 2018 financial year.

Our short summary below sets out someof their ideas for change.

During the year:

  • Inland Revenue will monitor the information it receives to help individuals get their tax payments right, and contact them to suggest changes - they do this already for tax codes used by employees
  • Inland Revenue will make information held about an individual available to them during the year, again much of this information is already available on-line.
  • Individuals will be able to upload copies of donation receipts to myIR during the year.  Note, those already on payroll giving receive their tax credit during the year anyway.

At the end of the financial year:

  • Individuals would have to provide information to Inland Revenue if they earn income other than "reportable income", as they do now. [Reportable income is defined as salary and wages where PAYE has been deducted]
  • Interest income from 1 April 2018, and New Zealand-sourced dividends and Māori authority distributions from 1 April 2020 will join that definition.
  • Inland Revenue would use information from previous years to prompt individuals to add information in future years.
  • On the basis of information it holds about reportable income, Inland Revenue would calculate whether people are due a refund or have tax to pay.
  • If refunds or amounts of tax to pay are above specified thresholds, Inland Revenue would issue the refund or request payment. If the amounts are smaller than these thresholds Inland Revenue will not take any action - think I have heard this one before (see above).

 After year end:

  • Individuals can ask Inland Revenue to correct the information held.
  • Where the Revenue consider that tax is owing they may issue a Default Assessment.
  • This can be corrected in an informal process of filing a return and the Revenue treating that as a request to use the information to update its assessement (at its discretion).
  • Or alternatively the taxpayer would move into the formal Notice of Proposed Adjustment (NOPA) - this is a worrying sign, as strict rules on formal and technical information is required and tight timing rules apply. The average taxpayer would in my opinion not be able to complete a NOPA in the manner required.
  • Would there be additional timing to file a NOPA if the Revenue didn't adopt the return filed (i.e. failed to adopt its discretion to accept the information)?

Other ideas and considerations to be addressed:

  • The increasing use of withholding taxes on contractors.
  • Special tax codes for those with second and third jobs, default main tax code for those receiving social income support.
  • How this will affect those who are not "cash basis persons" for the financial arrangement rules.
  • Financial institutions declaring to Inland Revenue information under the Foreign Account Tax Compliance Act (FATCA) requirements, and the Common Reporting Standard as part of the Automatic Exchange of Financial Account Information in Tax Matters (AEOI) - both of which will be received byInland Revenue well after year end.
  • Residential land sales information passed on by the Land Information Office, triggering potential income without further information.
  • How those receiving family assistance need to confirm their income (currently by filing an annual return), how those with student loans will be treated.
  • How will those with no access to the internet complete their obligations (or know what the Inland Revenue have as their income)? How will those not capable of interacting through myIR accounts meet their obligations?

Interesting facts:

  • For the 2015 tax year there were 778,000 people with refunds who did not file or request a personal tax summary where their refund would have been over the minimum threshold of $5. One suggestion in their current paper is that if a different method / approach was adopted 465,000 of those taxpayers would have received their refund automatically in their bank account.
  • In the same year 617,000 people with tax to pay did not file or request a personal tax summary. If the alternative approach had applied in that year, with the current threshold of $20, Inland Revenue would have required 179,000 people to pay tax, but the 36,000 people who filed a personal tax summary with tax to pay under $20 would not have had to file (and pay).
  • If the specified threshold for debts was rasied to $66, Inland Revenue would have required 136,000 of these people to pay, but the 58,000 people who filed a PTS with an amount of tax to pay less than $66 would not have had to file.
  • In 2015, 3,334,000 people earned income with PAYE deducted (including benefits and New Zealand Superannuation), or declared earning interest or dividends.
  • Nearly 2 million taxpayers are active on myIR accounts.

Want to read more? The full discussion paper is available on the Tax Policy website.

Want to know more about Shellock Consulting, or contact us then go to our website www.shellockconsulting.co.nz

 

Posted: Tuesday 20 June 2017