Business transformation: First real glimpse of what’s in store for tax system modernisation

By Robyn Walker and Nigel Jemson

After a very quiet 2014, 2015 must go down in the tax history books as the year of consultation. From debt remission, employee share schemes, non-resident withholding tax, land withholding tax, GST on cross-border goods and services, close companies, and tax bills, there has been a non-stop flow of papers to read and comment on (and that’s ignoring all the work of the OECD on Base Erosion & Profit Shifting).

Inland Revenue’s business transformation project is ramping up following  two consultation papers released in March this year. After much theoretical musing about the tax system, a further three documents have just been released by the Government.  These documents provide the first concrete details on proposals to be progressed under Business Transformation and represent another step along what is a long journey of consultation and implementation of changes.

These documents contain some important proposals that will form the foundation for the future tax system.  For those readers who are suffering consultation fatigue, we summarise, as much as we can, the key matters to be aware of from these latest documents and we hope this will encourage you to look closer at the documents and to take the opportunity to comment before the consultation deadline of 12 February 2016. In this regard the documents set out a number of key questions to consider and comment upon.

The first discussion document Making Tax Simpler: Towards a new Tax Administration Act sets out proposals to modernise the framework underpinning tax administration with a particular focus on the role of the Commissioner (including her information-collection powers and secrecy obligations), and the roles of taxpayers and third parties. 

The second discussion document Making Tax Simpler: Better administration of PAYE and GST considers changes to the administration of PAYE and GST by integrating PAYE and GST obligations into businesses’ accounting systems, and also discusses improvements to the PAYE rules more generally.

The third document summarises the submissions and online comments received in respect of the two previous discussion documents (Making Tax Simpler – Better digital services and Making Tax Simpler – A Government Green Paper on Tax Administration) released earlier this year. The feedback has been incorporated into the first two documents that have just been released, so we haven’t discussed this further in this article.  

The purpose of the latest discussion documents is to consider how policy and legislative settings should frame and support Inland Revenue’s business transformation programme in the areas covered in each discussion document.  It is clear that rather than being an update to Inland Revenue’s existing computer system, the proposals contained in each discussion document and future documents represent a fundamental opportunity to ensure that the tax rules match the capabilities of Inland Revenue’s future computer system, and to ensure that the rules underpinning the tax system make it easier for taxpayers to comply with their obligations.

We provide a summary of the key proposals in each discussion document below.

Reform of the Tax Administration Act

This discussion document considers how the tax administration system can be improved.  This is done via detailed policy proposals in some areas, while in other areas, the  direction of further reform to the tax administration system is discussed.

Key areas considered in the discussion document are:

• The role of the Commissioner;
• Information collection and tax secrecy;
• The role of taxpayers and tax agents; and
  
• Future issues.

Role of the Commissioner

Of particular interest to taxpayers is the discussion document’s consideration of the Commissioner’s “care and management” responsibilities in the Tax Administration Act.  A current restriction on the Commissioner’s  “care and management” responsibilities is that she cannot deliberately act contrary to her view of the correct interpretation of the law.

In this regard, the discussion document includes proposals to clarify the Commissioner’s care and management responsibility to allow the Commissioner greater administrative flexibility in limited circumstances.  It is proposed that the Commissioner would be able to:

• Apply a policy-based approach to small gaps in the tax legislation;
• Deal pragmatically with legislative anomalies that are minor or transitory;
• Address cases of hardship (inequity) at the margins; or
• Deal with cases in which a statutory rule is difficult to formulate (meaning that the relevant legislation has failed to adequately deal with the particular situation).

This is a positive development and it would be pleasing to see the Commissioner being able to adopt a pragmatic approach in applying tax law in more cases than the current law allows, while not going too far in giving the Commissioner wide discretionary power to apply the law how she wishes. Of course, this is on the proviso that the Commissioner’s discretion continues to only be applied in a taxpayer-favourable manner; something which the discussion document suggests should be the case.  Ultimately to ensure any changes are workable there will need to be careful legislative drafting and clear guidelines on the application of the new rule.

In addition, the discussion document also proposes changes to clarify the Commissioner’s “care and management” responsibility to Inland Revenue’s non-tax functions by introducing an additional limb to the current care and management provision.

Information collection and tax secrecy

A number of issues are considered in this section of the discussion document.  Particular ones to note include clarifying the ability of Inland Revenue to access information stored in the “cloud”, clarifying Inland Revenue’s power for access to large third-party datasets.  The discussion document recommends retaining a “necessary or relevant” standard (or something similar) for Inland Revenue to collect information (consistent with the current information gathering power in section 17 of the Tax Administration Act).  What is missing is clarity about who Inland Revenue targets to provide third-party datasets, what is collected and how often it is collected.  While Inland Revenue may consider documents as “necessary or relevant”, the businesses supplying the information may find the process disruptive and a time consuming distraction.  The discussion document partially recognises this when it states “… requiring third parties to provide this kind of information regularly could involve a significant compliance cost. This must be balanced against the wider compliance benefit to society from greater detection of under-reported or non-reported income, and the efficiency of collecting the information in a large dataset rather than needing to seek information from many taxpayers, including perhaps those who are not operating within the tax system.”

The discussion document also discusses taxpayer secrecy and while acknowledging the starting point that the confidentiality of a taxpayer’s individual affairs should remain protected, it proposes that the coverage of Inland Revenue’s secrecy rule should be narrowed from all information to protecting information that identifies, or could identify a taxpayer.

The role of taxpayers and tax agents

This section considers a range of issues.  One of the main issues covered is looking at an  individual’s obligations when they are issued income tax returns pre-populated with information by Inland Revenue, given this is an anticipated update as part of changes to Inland Revenue’s tax system.  Given the tax system is premised on a self-assessment basis, the document proposes that the taxpayer would be required to ensure that the correct amount of tax is paid and by a specified time, as it is currently.  If the taxpayer failed to respond, a default assessment would estimate the amount of tax to pay and would remain in place until the individual filed a return.

Future issues

The discussion document outlines some areas where  further reform is anticipated in future discussion documents and seeks feedback ahead of the release of more detailed proposals.  These areas are:

• Advice and disputes procedure; including the options available for taxpayers to seek Inland Revenue’s view;
• Application of the time bar, in particular the possibility of a reduced time bar applying in situations where Inland Revenue is comfortable the returns are very likely to be materially correct;
• Record-keeping requirements and whether these could be updated in the future to reflect the costs of keeping records in a digital environment.  The discussion document also asks the question as to whether the current time periods for keeping records could be aligned with the time bar; and
  
• Whether Inland Revenue’s new approach to compliance could result in a different approach to penalties.
  

PAYE and GST

PAYE and GST are central cogs of our tax administration system, and combined they make up 67% of  total tax revenue.[1]  A key focus of the discussion document is to future proof the existing PAYE and GST rules by adapting them to changes in technology.  In proposing changes to the way PAYE and GST are administered, the Government’s goals are to:

• Minimise the costs of PAYE and GST processes – both compliance costs for employers and processing costs for Inland Revenue; and
  
• Improve the quality and timeliness of PAYE information.

To achieve these goals, the key premise on which many of the discussion document proposals are based is the ability of businesses’ software packages to integrate with core tax functions such as PAYE and GST, rather than these being separate processes, as they currently are.

For example, rather than the completion of the employer monthly schedule being separate to a businesses’ payroll processes, Inland Revenue envisages that PAYE information could be provided to Inland Revenue at the same time the payroll process is completed.  Other envisaged changes include:

• Payroll packages and services including an option for a business to notify Inland Revenue of the decision to become an employer;
• Payroll software being used to advise Inland Revenue of a decision to permanently, or temporarily, cease to employ staff; and
  
• Enabling amendments to PAYE information to correct errors in prior pay periods to be made at the same time the changes are made in the employer’s own payroll record.

The discussion document also proposes a modernised web-based portal for employers who do not have payroll systems which support the planned new digital services to submit PAYE information to Inland Revenue.

In light of the anticipated integration of PAYE with business software packages, a number of changes are proposed to the PAYE rules which will enable employers to file digitally and/or provide PAYE information to Inland Revenue at the same time as the related business process.  The discussion document proposes three different options to implement this:

• Voluntary-first approach: Legislation would be amended to allow employers the choice of meeting their PAYE obligations by submitting PAYE information at the same time as the related business process occurs.  Under this approach, a legislative requirement for all employers to follow this approach would only be considered after a critical mass were using the new services and the costs and benefits to the system as a whole justify change.
• Legislated approach: Under this approach, the Government would set a time-line identifying when employers will have to follow the digital approach.  This requirement would likely be staggered for different classes of employers.
• Review approach: A middle ground, under which there would be a defined period during which employers could voluntarily meet their PAYE obligations by providing PAYE information at the same time as the business process.  This would be followed by a required review where the employer would be required to review the costs and benefits of adopting the new digital services.  Depending on the outcome of the review, employers would then be given a lead-in period in which to adapt to the digital approach.

It will take time for employers to upgrade their payroll software systems and will likely involve significant costs for larger employers.  Given this, in our view, we do not feel there is a need at this stage to require employers to adopt digital services for meeting their PAYE obligations.  Rather the benefits of moving to digital services should speak for themselves. Given the likely reduction in compliance costs once an employer’s payroll systems have adapted to the digital approach, it seems likely that the benefits of this will encourage many employers to voluntarily move to an updated software package which provides PAYE information to Inland Revenue at the same time as the related payroll process.  Mandating a timeframe for employers to adapt to digital services is not necessary at this stage but could be revisited in the future.

The discussion document also considers real-time collection of PAYE and requests feedback on whether employers should be required to remit PAYE and related deductions at the time employees are paid.  It is envisaged that this would be aligned with the update of digital services in how PAYE information is provided to Inland Revenue.

Other proposals the discussion document considers in relation to PAYE include:

• Reducing the threshold for electronic filing of PAYE information from $100,000 a year to $50,000 of PAYE and ESCT;
• Considering whether the method for determining the amount of tax to be deducted from an extra pay should be changed;
• Considering whether the tax treatment of holiday pay should be clarified legislatively or administratively by Inland Revenue publication;
• Considering whether a mechanism should be introduced to improve the accuracy of PAYE withholding in years in which an extra pay day will occur; and
  
• When there is a legislated rate change, considering whether the treatment should be aligned across tax types/products.

One chapter in the discussion document is devoted to GST.  Similar to proposals for PAYE, the discussion document proposes to allow registered persons the option of providing GST information to Inland Revenue directly from their integrated accounting software rather than producing and filing a GST return as a separate manual process.  In addition, the discussion document envisages further improvements under new digital services, such as the ability for registered persons to voluntarily attach accompanying documents or correspondence to a GST return, and enhanced payment solutions that make it easier for registered persons to pay GST.

None of the changes proposed in relation to GST will be mandatory for the foreseeable future.  GST registered persons will have the option whether to adopt digital services in this area given that submission of GST information does not have a direct effect on third parties in the way that PAYE does.

Conclusion

The closing date for submissions on both discussion documents is 12 February 2016.

At this stage, it is not entirely clear what the way forward will be after this round of public consultation has finished.  It is noted in the documents that a formal timetable will not be set until the Government has made a decision on the approach to sequencing Business Transformation changes across the tax system. It is expected that feedback from this consultation process will continue to be factored into future consultation as the proposals become more concrete, and ultimately converted into legislation.     

For further information or should you wish to discuss these proposals further, please contact your usual Deloitte advisor.

Stayed tuned to Deloitte Tax@hand and Deloitte Tax Alerts for further developments..

[1] Making Tax Simpler: Better administration of PAYE and GST, Inland Revenue, November 2015, page 8.