Making tax simpler for individuals
Tax Alert - July 2017
By Emma Marr and April Wong
Following on from extensive proposed changes to the information disclosure requirements of employers and payers of investment income (see our April Tax Alert and May Tax Alert for more details on the draft legislation), the Government has revealed the next step in their master plan – how they will use all that extra information. The release of the discussion document, Making Tax Simpler, Better administration of individuals’ income tax, outlines the Government’s plans on modernising the tax system for individuals.
As foreshadowed in the Government’s comments when the draft legislation was tabled in April, the objective of the new rules is to be able to pro-actively manage the tax rates that are being applied to individual’s income during an income year. This will reduce or eliminate the need for tax payments or refunds to be made after year end, and will also allow Inland Revenue (“IR”) to adjust tax payments for individuals who currently have no obligation to file a tax return, and so who might currently be either under - or over - paying tax, without any idea that is happening. In addition, the Government will have the information it needs to adjust social policy payments during the year using up to date information.
Although there are two alternative options proposed in the discussion document, the document appears to focus on and perhaps prefer the so-called “alternative approach” that will enable individuals who derive only certain types of “reportable income” (i.e., salary, wages, and investment income), to no longer have to file returns to qualify for a tax refund, and instead, have refunds automatically calculated by IR and deposited into their bank accounts. On the flip-side, taxpayers who end the year owing tax due to under-deductions during the year will no longer get away with not paying it just because they are non-filing taxpayers.
It is envisaged that the number of individuals who end up with large tax bills at the end of the year will reduce as tax payments will become more accurate throughout the year. It is estimated that an additional 1.1 million people will not have to provide any information about their income to IR, bringing the total number of people who do not need to file any returns up to 3 million.
With over 2 million customers active on myIR as at 1 December 2016, we commend IR for further developing its online platform to give individuals the opportunity to better engage and work together with IR.
The current filing rules
Currently, individuals have to work out whether they need to file a return, request or amend a personal tax summary, provide further information, or whether they do not need to take any action to finalise their tax position.
The rules surrounding whether taxpayers have to file a return are not always easy to understand or follow. Further, individuals who are required to file an income tax return must pay any tax that has been underpaid during the year, whereas a person who is not required to file a return does not. For some time now, tension has been bubbling within the tax administration system over the unequal treatment between filing and non-filing taxpayers. Although the current rules were intended to reduce the number of individuals filing returns or receiving a personal tax summary, in the 2015 tax year approximately 1.1 million people submitted a personal tax summary and an additional 1.1 million people filed an IR3 tax return form. The current rules are more complicated and burdensome for individuals than they are intended to be.
The proposals in a nutshell
The discussion document sets out two options for which individuals should have to provide information to IR; the “improved status quo” and “alternative approach”.
Improved status quo
Under the “improved status quo” approach, IR would continue to issue personal tax summaries when appropriate, and the individuals who receive them would have to either confirm or complete them. If a personal tax summary is not issued, individuals will still need to determine whether they need to request a personal tax summary. This approach builds on from the earlier legislative changes noted in our April Tax Alert, which requires the payers of salary and wages, and of investment income, to provide more extensive and more frequent information to IR during the year. The only real difference in this approach is that IR would have more information available, so would be likely to issue more personal tax summaries as it identifies taxpayers with more tax to pay.
The alternative approach separates the rules around providing information to IR from the rules around filing a return. The starting point under the new proposals is that individuals who only earn “reportable income” will not have to provide information to IR. Reportable income will be income for which IR receives third party reporting during or shortly after the end of the year, such as employment income, the taxable value of employee share scheme income, and investment income.
Individuals are currently required to consider whether tax has been correctly deducted from their income, but once third parties are supplying this information, if the individual receives only “reportable income” the process will become much simpler. IR will calculate any difference between the amount of tax remitted through withholding tax, and an individual’s tax liability on this income. If there is no further tax to pay or refund, no further action would be taken. If there is tax to pay or a refund, or if IR consider they need further information, IR would then follow up with the individual.
Individuals will have a prescribed period to respond to IR’s calculation (to make any necessary changes, i.e., to add any non-reportable income or claim a tax deductible expense), but if they do not respond in time, then they will be deemed to have accepted the information as displayed on myIR. IR also reserves the right to examine whether a particular individual has received non-reportable income (for example, an individual may derive rental income). An electronic default assessment (EDA) could be issued based on the amount of income previously returned by the taxpayer. A person who files a return following the issue of an EDA will be treated as filing a request to the Commissioner to amend the assessment. A “notice of proposed adjustment” is also able to be issued in response to the EDA.
If individuals receive non-reportable income (eg from partnerships and look-through company interests, trust income, and overseas investment income), they will have to provide information to IR. In addition, if a taxpayer is required to make provisional tax payments, is not a domestic tax resident, has tax credits to carry forward, has a tax loss/tax balance component in their accounts, and/or is not cash basis person under financial arrangement rules, they will also be required to provide information to IR.
For the majority of people who are required to provide information, they must do so by 7 July every year, subject to extension of time arrangements. If the individual interacts before 7 July and confirms their statement, it will become an assessment on the day they confirm their statement. The effect of the amount calculated crystallising onto an assessment is that the taxpayer is liable to pay the amount to IR, is entitled to receive the amount as a refund, or is entitled to carry the amount forward as a net loss.
Other things to note
Donations to charity
Currently, individuals can claim tax credits for gifts of $5 or more made to donee organisations such as charities by filing a claim form and submitting this to IR with receipts as proof of claim. The discussion document proposes that individuals scan their receipts directly onto myIR during the year or at the end of the year. We welcome this proposal as it digitally streamlines the process and makes it easier and more accessible for individuals to claim tax credits.
Special tax codes
The Government proposes making special tax code certificates easier to get and maintain. Special tax codes are particularly useful for individuals who are receiving more than one type of income, for example a benefit and employment income, or working two jobs, which results in an income tax threshold being crossed. IR proposes that it could access the information it collects proactively and, if appropriate, suggest that an individual apply for a special tax code from the information held about the individual’s income, and subsequently inform their employer about the change in tax code if the individual wishes to switch tax codes.
Individuals would also be allowed to apply for a special tax code online and would not need to re-apply for a special tax code every year, which is a welcome change from the current tedious process whereby individuals have to fill out a special tax code application, post it to IR, and inform their employer of their tax code change. This resulted in a very low number of individuals opting to use a special tax code (in the 2015 tax year, only 7,975 individuals used a special tax code). We welcome this change as it empowers certain individuals with the ability to control their tax liabilities and ensure that they are not being over-taxed during the year.
The Government does not propose mandating the use of a special tax code given that it can still result in a refund or tax to pay if income is variable or does not remain at the level the individual predicted.
Refunds and payments of tax
Individuals can choose to receive refunds via direct credit or a posted cheque. IR is proposing to eliminate the posted cheque option, with limited exceptions. We support this proposal insofar as it reduces compliance on IR’s part, but express concern about the larger percentage of non-individuals who receive their income tax refunds through cheques. In the 2014/15 year alone, it is reported that 56% of taxpayers opted to receive their refunds via cheques.
IR proposes that individuals will be able to pay tax directly from myIR, in addition to the current options of paying via bank transfer or by debit/credit card on IR’s website. Existing ways to recover tax, including issuing a “notice to deduct” to a third party payer, setting up an instalment arrangement, or writing off amounts under the $20 threshold, or if the individual is experiencing serious financial hardship, will continue to be available.
IR can refrain from collecting tax owed if it is below $20, and can choose not to issue refunds if they are less than $5. Given that refunds will be made electronically, IR suggests that there is no longer a need to retain the $5 threshold as there would be no compliance cost on IR’s part. As an additional 456,000 people will be entitled to a refund (if the $5 threshold was repealed) according to the 2015 tax year statistics, we support the repeal of this threshold.
We generally commend the Government’s efforts to simplify tax for individuals. It is especially notable that refunds and payments of tax may crystallise in future without any tax return being filed. This should make it easier for individuals to comply with their tax obligations, and to remove the sometimes arbitrary distinction between non-filing and filing taxpayers.
It is interesting to note that although the Government acknowledges that one reason for these reforms is the ability to amend social policy payments, such as child support and Working For Families tax credits, none of the examples in the discussion document illustrate how these payments could be reduced during the income year, based on other information that will be available to IR. The examples in the discussion document focus more on situations in which taxpayers could receive a refund at the end of the income year or reduced tax payments during the income year. Given that IR have identified that in the 2015 tax year, 617,000 people with tax to pay did not file or request a personal tax summary, we suspect there will be a significant number of taxpayers who will be surprised by an assessment of tax if the new rules go ahead. Nevertheless, the 778,000 people entitled to a refund in that same year who did not file or request a personal tax summary will be more pleasantly surprised under the new rules.