"Simplify” - as in tax simplification

This week the Government introduced its new tax bill, including tax simplification rules. “Simplify” - To make simple or simpler, as:
a. To reduce in complexity or extent.
b. To reduce to fundamental parts.
c. To make easier to understand.

At just 134 pages, we are grateful for the Government’s commentary on the new Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill.  It certainly makes our life simpler having someone just give us the basics!  In an effort to save you reading the commentary, we have summarised the summary (so to speak).

Provisional taxpayers have a 4th option by making regular payments based on their cash flow, provided they used an approved accounting system.  The Accounting Income Method (AIM) will in the main be for taxpayers with a gross turnover of under $5m pa. 

Taxpayers must elect in before their first instalment date, and pay either monthly (if on GST monthly), or two monthly if on GST of 2 or 6 months, or not registered for GST.  The new rules won’t apply until the 2018–2019 income year.

Provided the taxpayer complies with the AIM calculation, they will not be charged interest if the ultimate tax result is higher.  Similarly, if there is an overpayment no interest will be paid to the taxpayer.  If a taxpayer has paid based on the AIM but later cash flows show they have overpaid they can apply for a refund.  AMI payments cannot be paid via a tax pooling agent.

Only shareholder salaries in cash will be taken into account during the year under AIM, but to offset this any tax over paid by a company can later be transferred to a shareholder’s personal liability.

Overall, this option may be attractive to many SME’s but there are pitfalls and SME’s will need to use an approved software provider (and get it right).  It will certainly help those taxpayers that have ebb and flow of cash during the year and those who want to pay tax as they go.  This is also good for those moving to self-employment from a PAYE employee basis.  But it does mean the Inland Revenue gets their share of the cash early.  So on a “who wins” score card – the Revenue takes Gold.

Safe harbour taxpayers are increased from $50,000 (final tax bill) to $60,000 and now include non-individuals, with effect from the 2018–19 income year.  Given that the rate of $50,000 has been around for years this really is a Clayton’s benefit to taxpayers, but extending to non-individuals is a nice touch.  So we award taxpayers a Bronze medal – in a small field.

Interest on under paid provisional tax on the first two instalments will not be charged if the taxpayer paid based on the standard provisional uplift method (last year’s tax plus 5%).  All standard method “associates” must also use either the GST ratio method or the standard method to qualify.  Interest will still apply to the third instalment.  This rule will take effect from the 2018–19 income year.  A small win, and a complicating factor makes taxpayers this just picking up a Bronze medal in a tight finish.

Provisional tax attribution (PTA) rules will be introduced that allow companies to pay the shareholder employees (and attribution income taxpayers) provisional tax.  Elect in and out rules are still to be determined, but probably after the first year introduced taxpayers will have to elect before the commencement of the tax year.  There will be some fiddling around on who carries the interest obligation if the provisional tax is underpaid.  This rule will take effect from the 2018–2019 income year.  We can’t see how this is a win for the taxpayer and it will be complicated, so the taxpayer doesn’t even make the finals on this one.

Contractors – those subject to schedular payments (withholding tax in old language) can elect their own rate subject to a minimum rate of 10% and being a ‘good taxpayer’. Labour-hire firms will have an obligation to deduct withholding tax when they make payments to contractors (including companies). Labour-hire firm contractors will not be eligible to receive certificates of exemption from withholding but can elect their rate, or apply for a special tax code to 0% if appropriate. Contractors not under the schedule payment rules can elect in. All these changes are set to take effect from 1 April 2017. There’s some good and bad in this, so let’s call it a Bronze for both sides.

The 1% pm incremental late payment penalty will no longer apply to new liabilities for GST (from periods after 24 March 2017) and income tax payments (from the 2017-2018 year) and Working for Families overpayments (from the 2017-2018 year).  Eliminating bad press and spiralling debt make this an offer that the Revenue gets points for, but the taxpayer only wins by default.

Self-correction errors threshold for minor errors doubles to $1,000 tax “It will also reduce the administration costs, as Inland Revenue will not have to manage these low-value items.”  Blatant self-interest for the Revenue means it wins a Gold by a wide margin subject to drug testing results.

Calculation formula for business use of personal vehicles and home office is supposed to be less complex, but doesn’t look like it from here.  Applicable from the 2017–2018 year.  The taxpayer could rightly consider they have been unfairly eliminated for a false start.

RWT exemption certificates will not expire automatically annually.  Welcome back to the past, and was a no brainer really as the Revenue struggled to process annual applications in time.  A Silver for the taxpayer in a weak field.

Reporting taxpayers who owe tax – in a significant move the Inland Revenue will be able to report to Credit Reporting Agencies where a taxpayer has not paid their tax.  This has to be on reportable tax, will include interest and penalties charged, and not involved ‘disputed’ amounts (under the Act).  The taxpayer must owe a required quantum of reportable unpaid tax.  This threshold is defined as owing a reportable unpaid tax amount of either $150,000 or the amount is more than a year old and the amount is more than 30 percent of the taxpayer’s gross income.

The Commissioner would be required to serve the taxpayer personally, with a formal notice advising them of the amounts of reportable unpaid tax, and provide a 30-day notice period before deciding whether to disclose the taxpayer’s information. 

The amendments will apply from 1 April 2017.  Potentially, this could be an own goal for the Revenue, as it may trigger more formal disputes to delay the reportablity.  Although, the Revenue’s intent is to name and shame taxpayers into complying, in our experience taxpayers don’t pay their tax because they (a) don’t have the money, (b) dispute the amount, or (c) don’t want to pay and have no intention of doing so.  How naming and shaming will improve any of these is doubtful.  So we consider that the Revenue will be out of the medals on this one.

Anything else?
There are other minor changes, mostly of little relevance or benefit to the taxpayer.

Finally, there are changes to the Foreign Trust rules, as previously indicated by the Government following the Shewan report.  They affect so few New Zealanders that this does not even reach qualifying selection.  To read more about proposed changes click here for our earlier blog.

So a little bit for everyone, but the Revenue is a clear leader on the Medals Board.

If you would like to know more about how this Bill could affect you then contact us.

Posted: Wednesday 10 August 2016