Better administration of Social Policy
Tax Alert - August 2017
By Rebecca Osborn
Last month the Government released its ninth discussion document aimed at modernising tax and social policy administration, Making Tax Simpler: Better Administration of Social Policy. It is the final piece of the puzzle that is Inland Revenue’s Business Transformation programme, which first kicked off consultation in March 2015. Earlier discussion documents have seen the imposition of greater reporting by payers of various types of income, including payday reporting of PAYE income and monthly reporting of investment income. Until recently, the Government has adopted a “trust us, we promise this information is necessary” approach. With this discussion document, and the Making Tax Simpler for individuals document released in June (see the July Tax Alert) taxpayers and businesses are finally able to see whether the Government has stayed true to its word.
By way of a quick recap, Inland Revenue administers a number of the Government’s social policy programmes, including: working for families tax credits (WFF); child support; student loan repayments; and KiwiSaver contributions.
Inland Revenue has accumulated these social policy responsibilities over a number of years, resulting in different rules and processes for each type of payment, causing complexity and confusion. The Government acknowledges that a “tax administration approach” to the administration of social policy programmes may not be fit for purpose or responsive enough to the changing needs of the social policy programmes.
Overall the proposals aim to ensure that Inland Revenue’s “customers” are receiving or making accurate social policy payments at the right time. Implicit in this goal is a desire to minimise and better manage social policy debt.
The proposals should not alter the amount someone is entitled to receive or is obligated to pay, and entitlements will continue to be set with reference to an individual or family’s income. Inland Revenue will still perform a year-end square-up calculation to ensure correct payments have been made. However, the expectation is that the “unders” and “overs” will be minimised. This is where the extra income reporting from income payers comes in (see the April Tax Alert). The Government hopes that with more frequent information, Inland Revenue can respond in “real time” to changes in income, and can adjust entitlements or payment obligations accordingly.
Working for families
Currently, WFF payments made during the year are based on a family’s estimate of their income for the coming year, with a square up at the end of the year. For the 2015 tax year square ups were required for 300,000 families, with 41.7% of families underpaid during the year and 24% overpaid.
The Government is proposing to base payments throughout the year on recent actual income (for example, income two months prior) rather than estimated future income, with the hope this will more closely align to a family’s actual entitlement for the year. When income is not observable (i.e. it does not have tax withheld at source, such as self-employment income) the annual assessment would remain or customers could provide additional information throughout the year.
It is proposed that an annual assessment for child support will be retained, while some changes are being considered to ensure that payments are set with reference to the most recent actual information.
However, the real story on child support is the mounting child support debt. While not covered in the discussion document, it has subsequently been reported that child support debt has ballooned to $2.8b and is owed by 122,116 debtors, an average of just over $23,000 per debtor. Of the amount owing, $2.2b relates to interest and penalties – a pretty clear indication the current system is broken.
Once a child support debt arises compulsory wage deductions apply. The Government is proposing to extend compulsory wage deductions to all parents liable to make payments, rather than only those who are in arrears. Inland Revenue would notify the liable parent and instruct the employer to deduct the child support payments.
Child support liable parents who do not have compulsory deductions (for example because they are not a salary and wage earner) will have to make more frequent payments and earlier than they currently do.
Student loan repayments
Student loan repayments are only deducted automatically from salary and wage income. However, student loan borrowers with other sources of income will have a repayment bill due at the end of the year. The Government is seeking to improve the timeliness of repayments for New Zealand based borrowers with other income by:
- Extending automatic deductions to income similar to salary and wages such as scheduar income, casual agricultural or election-day income; and
- More timely payment of student loan repayments in relation to other income, for example by extra deductions from salary and wages or regular direct payments to Inland Revenue, based on prior year income.
An annual square up exercise will still be required to ensure that overall the borrower has met their repayment obligations for the year.
No changes are proposed to the repayment mechanisms for overseas based borrowers.
Managing missed payments and overpayments
While the proposals attempt to achieve more accurate social policy payments on a real time basis, the discussion document acknowledges that social policy debt will still arise. To better manage different types of debtors (for example, those struggling to do the right thing compared to those who are deliberately non-compliant) it is proposed that Inland Revenue will have a range of tools to help customers manage overpayments or missed payments. These include:
- An annual small balance write off of $20 applied consistently across all social policy types.
- Various options for repayment methods and frequency based on the customer’s preference.
- Ability for Inland Revenue to recover debt from future entitlement payments.
- Agreed arrangements to deduct repayments from salary and wages or from bank accounts.
When these arrangements are in place, interest and penalties would not apply.
Inland Revenue’s existing powers for stricter debt collection actions would be retained, including demanding payment of a debt in full, and imposing penalties and interest on overdue amounts. Information matching and the ability to make arrests at the border would also remain.
Customers with unusual circumstances
The Government is also proposing to provide Inland Revenue with discretion to work with customers who have unusual circumstances in order to achieve the intended policy, based on principles of equity, fairness and reasonableness. It is intended that the discretion would be applied for the customer’s benefit and will not be used to reduce entitlements or increase obligations, noting that its application in a child support context may be more nuanced given this involves payment going from one person to another.
Overall, it is pleasing to see some flexibility introduced into the social policy administration framework. It reflects that real people are having to interact with these programmes every day and a one size fits all approach will never succeed. Changes to remove penalties and interest in some cases are also a practical response to a large amount of clearly unrecoverable debt.
The Government and Inland Revenue will be banking on Inland Revenue’s new computer system (START) helping to deliver this flexibility in an efficient way. However, flexibility and a focus on individual circumstances often requires human intervention and it remains to be seen whether Inland Revenue will have sufficient resource to deliver this, as 1,500 jobs are due to be cut over the next three years. Given the additional compliance costs placed on businesses to give effect to these social policy changes it is important that they are effective, and that the savings and efficiency gains more than outweigh the costs borne in the private sector.
August 2017 Tax Alert contents