Automatic refunds and new tax return rules for individuals
Tax Alert - September 2018
By Veronica Harley
Included in a bill before Parliament are significant proposals to change the end of year filing obligations for individuals. The thing to note is that these measures, once enacted, are proposed to come into force on 1 April 2019, so will apply to filing obligations for the tax year ended 31 March 2019 which is not that far away.
The current process
Broadly under current rules, most individuals earning only salary and wages are not required to file a tax return because the PAYE withheld at source should equate to their tax liability on employment income where it has been withheld correctly. Inland Revenue may send a personal tax summary (PTS) to salary and wage earners if the information they hold suggests that PAYE has been under or over withheld for various reasons, like a wrong tax code being used for example. If you receive other income over a certain threshold, you are required to request a PTS or file an income tax return. However even if you are not required to, but think you are due a tax refund, you can request a PTS or file a tax return. Rather than claim any refund due directly themselves, many individuals use a “personal tax summary intermediary” whose business involves assisting people to claim refunds in return for a fee – usually a percentage of the refund.
However there is likely to be a number of people due tax refunds who do not make the effort to request a PTS and so miss out on any refund that might be due. Further the current process means that individuals can “cherry pick” refunds by not requesting a PTS in the years where there is tax to pay. Hence the whole filing process is to be streamlined and automated as Inland Revenue look to modernise the tax system.
Individuals will no longer be “filing” tax returns as such, but checking that their “account is complete”. It is proposed that Inland Revenue will pre-populate an individual’s account with Inland Revenue with information it has collected. For this purpose, individuals will fall into one of three groups:
Group A - These individuals earn only “reportable income” which is income from sources which Inland Revenue receives information about. For example, Inland Revenue receives gross salary and wage and PAYE information from employers and it receives details about interest earned and RWT withheld from financial institutions.
Under the new investment income reporting rules recently enacted and which are being phased in over the next few years, financial institutions will soon be reporting more frequent and more detailed investment information from its customers to Inland Revenue. A major reason for bringing in the investment income rules was for the purpose of pre-populating individuals’ returns.
With the information it holds, Inland Revenue will pre-populate an individual’s account. It is intended that the assessment will arise at the earlier time of when an individual confirms it is correct within the assessment period, or once the Commissioner notifies the individual that she is satisfied that the information held is complete and correct. The assessment period begins on 1 April immediately following the tax year end and will finish on 7 July (or later if the person has an extension of time). Once an account is complete and final, the individual is treated as having made a return of income, made a self-assessment and to have taken a tax position.
It will be possible for an individual to provide other information to the Commissioner such as deductible expenses or tax credits at this time. Any tax payable or refundable would automatically be calculated without the individual needing to provide any other information. Tax refunds would be issued automatically to individuals (preferably by direct credit) without the need to employ any intermediary or agent to act on their behalf. In theory for many individuals this process would all be automated and just happen so that any interaction with Inland Revenue is minimal.
An individual will have no obligation to provide reportable income information that has not been included in their pre-populated account to Inland Revenue unless they know or might reasonably be expected to know that the information in their pre-populated account is incomplete or incorrect.
Any amounts of tax to pay arising where tax was withheld in accordance with PAYE rules or at the rate corresponding to the individual’s marginal tax rate would not have to be paid. Further amounts of tax arising from a withholding tax regime where less than $200 of income was taxed incorrectly would also not have to be paid.
Group B – These individuals earn reportable income, but Inland Revenue considers based on previous returns it holds that the individual may also have other income or deductions. In this case individuals will be required to provide further information (subject to some de minimis rules) about other income items (e.g. trust income, partnership or look through company income, rental income, employment share scheme or self-employment income). Further the individual may (but is not required to) provide information about deductions, tax loss balances, donation tax credits or amounts of income protection insurance paid.
These individuals will be able to submit this information manually or electronically. This will be added to the individual’s pre-populated account which then becomes an “adjusted account”. This becomes final (and therefore a self-assessment arises) at the earlier time of when an individual confirms it is complete or correct within the assessment period, or once the Commissioner notifies the individual that she is satisfied that the information held is correct. If the Commissioner is not satisfied with information submitted (or not submitted), she has the power to issue a default assessment.
Group C - These individuals have no or very little reportable income and will be required to provide income information, such that the process will be similar to the current IR 3 process.
It will be possible for individuals to change the information in their pre-populated account at any time before these are confirmed. The Commissioner may also amend any information in the pre-populated or adjusted account to correct errors, but she must notify the individual of any amendments made.
Once an account has been assessed as final, the individual may ask the Commissioner to exercise her discretion to amend the account information under section 113 of the Tax Administration Act 1994 (TAA94). Section 108 of the TAA94 (the time bar rule) will apply as it does now to restrict the Commissioner from amending a tax return to increase tax payable if four years have passed since the end of the tax year in which the account was filed. However, this limit will not apply if the return is fraudulent, wilfully misleading, or omits all mention of income of a particular nature or derived from a particular source.
Tax rates and codes
The success of these rules requires individuals to use the right tax codes so that the right amount of tax is collected and ends up in their pre-populated account. Therefore, new rules will allow the Inland Revenue to monitor and be more proactive about contacting and suggesting people correct their tax code. However, Inland Revenue accepts that at the end of the day it is the individual themselves who have the best understanding of their likely overall income for the year and ultimately the decision lies with the individual as to whether to make the changes suggested. The exception is where an unsuitable RWT code is being used for investment income. The Commissioner will be able to instruct the payer to update the rate if, after making contact, the individual accepts the suggested rate or does not respond within 20 working days.
It will also be possible for individuals to apply online for a tailored tax code so that the right amount of tax is withheld throughout the year. This would be most relevant for individuals with secondary jobs, or who also receive social benefits.
Donations tax credits
As part of these changes, the current process of claiming a tax credit for donations made is to be simplified. New options are being added which should help make it easier for individuals to claim donations. With effect from 1 April 2019 (for the 2018-19 income year) there will be four ways to claim a tax credit:
- Upload donation receipts throughout the year to MyIR so that, at year end, the refund will be issued without the need to submit a tax credit form; or
- Complete the relevant donations section when providing other tax return information through the pre-populated account; or
- Complete a separate return online through myIR (that is after other income information is provided); or
- Compete a paper form (which is the current process).
Overall the new proposals and automated process is to be commended if all goes to plan with Inland Revenue’s new computer system. There are some great taxpayer friendly measures in this package, particularly the fact that many can look forward to receiving an automatic tax refund and may have literally nothing to do in order receive this.
However, likewise, if some individuals do not want an automatic tax bill at the end of the year, some individuals will have to be more proactive than they currently are in managing tax codes and responding to requests for information.
There will be those that will need to think about what further information, income or deductions needs to be submitted. If a taxpayer takes no action to submit information about income when it should, it would appear there are pretty easy grounds for the Commissioner to issue a default assessment. In theory this is no different to the current process, so it will be interesting to see how this aspect will be managed in practice before default assessments are issued to errant taxpayers.
For individuals with no reportable income, the process will be similar to the current approach and these are the people more likely to utilise a tax agent and have an extension of time within which to submit their income information to the Commissioner.
The key question is whether Inland Revenue’s new system will cope, giving the short lead in time and the fact there have been a few teething issues to date with regard to the Business Transformation process.
Submissions on this bill closed last month with oral hearings currently being heard by the Finance and Select Committee. The bill is expected to be reported back until early in 2019 with the final rules passed before 31 March 2019.
September 2018 Tax Alert contents
- Tax Alert - September 2018
- IRD guidance on withholding tax for non-resident directors fees
- GST change for non-profit organisations: Inland Revenue’s proposals released
- Transfer pricing: developments in debt pricing
- BEPS guidance released to provide clarity
- Automatic refunds and new tax return rules for individuals
- Recent developments