Tax Alert - March 2022
By Amy Sexton & Robyn Walker
Issues papers set out the Inland Revenue’s initial views on a topic and request feedback from interested parties on the questions prompted by these views. They are intended to stimulate discussion and allow for the Inland Revenue to gain a better understanding of the practical concerns of taxpayers. The latest Issues Paper released by Inland Revenue is entitled Tax administration in a digital world, and essentially is some blue sky thinking about how the tax system can be further enhanced with the completion of Inland Revenue’s Business Transformation process.
Why go digital?
After the completion of the Business Transformation programme, the Inland Revenue is exploring how to utilise this modern administration system to expand the digitisation of the tax and social policy systems.
Tax administration is traditionally a sequential process, involving several paper-based steps that involve identification of taxpayers, transaction reporting, applying tax rules, calculating tax due, paying tax, audits and the enforcement and appeals process. However technology is moving fast, and business systems have moved away from paper and are becoming fully digital. This now makes digital the “natural system” for businesses. Inland Revenue sees that by businesses being fully digital, tax calculations can be embedded in accounting and transaction software, making tax a seamless and automated process, and therefore reducing compliance costs. Inland Revenue describes this as a paradigm shift for both taxpayers and tax administration.
There are a number of potential benefits to digitising the tax system, including:
- Better compliance as compliance improves when paying tax is easy to do;
- Making it harder for taxpayers to get it wrong or manipulate data;
- Lower compliance costs, stress and risk for taxpayers;
- Lower administration costs for Inland Revenue; and
- Creating value throughout the economy through more efficient processes or providing a spur to innovation.
How do we get there?
Inland Revenue does not see itself as driving the shift to digital, instead, it is about keeping up with how people are already living their lives and doing business. Inland Revenue sees a future role as an enabler, with the customer-facing parts of tax compliance being delivered by private sector intermediaries. To be able to do this Inland Revenue believes that the existing tax system will need to be adapted and legislation simplified to allow more digital processes.
In the digital world, data is cheap and people are expensive, this flips the traditional view on its head. Inland Revenue, as a tax administrator, sees this as an incentive to change to:
- Automated tax processes that do not need human intervention, which would generally mean eliminating complex judgements; and
- Tax rules that do not require as much accuracy when determining tax liabilities. The cost of complete accuracy, via human intervention, outweighs the tax saved (by taxpayers) or collected (by Inland Revenue).
This simplification of the tax (and social policy system) will require changes in several areas, including:
- Legislation written to support machine learning to allow automation with external systems;
- Simplification of year-end tax returns, including simplification of adjustments, taxpayer flexibility in cash/accrual decisions and a simplification of asset depreciation schedules;
- Changes to systems for paying tax, including through intermediaries;
- A greater role for intermediaries in assisting taxpayers to comply with and determine tax liabilities; and
- A move to real-time systems, which questions the length of existing time-bar periods and whether a real-time system means these should be reduced.
Inland Revenue sees the move to digital would expand the role of external parties into three broad areas:
- Traditional tax agent/intermediary;
- Providers of products and services taxpayers use for business that as a by-product assist taxpayers with their tax; and
- Providers of services that are unrelated to tax but use tax information and require access to data held by Inland Revenue.
Inland Revenue’s goal is to create a “seamless boundary” between the enteral parties and Inland Revenue to provide greater flexibility and convenience to taxpayers and social policy customers. However, this “seamless boundary” and data sharing raises many questions about the regulation of these external parties, data collection and sharing.
Currently, the Tax Administration Act 1994 defines the entry requirements and rights of external parties, including tax agents and PAYE intermediaries. Inland Revenue believes that this rigid definition framework will not provide flexibility for the development of the new roles for external parties that are likely to result from digitisation. The issues paper examines a number of different approaches Inland Revenue is considering for a new regulatory framework, including an “obligation” to uphold integrity and limiting access to Inland Revenue data and services based on the role the external party performs for their customer.
Data collection and sharing
Traditionally Inland Revenue has needed to physically collect and store data. With a move to digital, there may be a case for, in some instances, Inland Revenue to only need access to data held by external parties and not physically collect this data anymore. In turn, Inland Revenue is considering whether it should share, on taxpayers’ consent, data it holds with non-governmental third parties. This move to share data more widely would be consistent with the Government’s policy to implement a new legislative framework for consumer data rights (with legislation planned for 2022).
Any discussion on the collection and sharing of taxpayer data will raise serious concerns surrounding the security, privacy and use of that data and the Inland Revenue will need to be very clear on how it will protect taxpayers.
What does the future look like for different taxpaying groups?
Inland Revenue sees the digitisation of tax administration as being most beneficial to the small business sector, being the self-employed, micro and small-medium businesses. These businesses are likely to have less complex tax issues and tax calculations that can be automated and embedded into business software.
Larger businesses are described by Inland Revenue as having “complex and bespoke tax affairs” which makes the standardised solutions that are anticipated for smaller businesses unsuitable. There may be some areas where the tax administration of large businesses can be improved and compliance costs reduced, however, it is expected that manual intervention will still be required for large taxpayers.
A concern with this “two-tier” approach is that the owners of small businesses that grow into large business (and their accounting/business systems) will be unprepared for the steep increase in tax compliance requirements (and costs) when moving into this “manual intervention” tax model.
It is expected by Inland Revenue that there will be limited scope for further improvements for individual. The year-end tax process is already largely automated for the majority of individuals who have third parties providing information to the Inland Revenue when they receive income with PAYE deducted and investment income with tax already withheld.
Inland Revenue is aware that there are those who are not able to or will not want to, embrace the new digital technologies. Inland Revenue states it is committed to continuing to provide personalised services using non-digital channels as there is a right to access government services.
The Issues Paper raises some interesting and valid ideas that could really improve the tax system. However, as the Issues Paper rightly points out, it will require a paradigm shift from both taxpayers and Inland Revenue. Anyone who has ever tried to read tax legislation will be able to attest that our current set of tax rules have been becoming increasingly complex and filled with exclusions and exceptions, so it can be difficult to envisage a scenario where legislation is sufficiently simplified to allow automation to occur. The complexity in legislation can be driven by both Government and taxpayers who respectively look to capture or exclude certain transactions from tax. A move toward simplification will require acceptance that sometimes tax won’t be collected, or in contrast tax will be collected in a scenario that might not seem fair – that might be a paradigm shift too far for some.
If you wish to discuss the topics raised in this issues paper further, please contact your usual Deloitte advisor. If you wish to submit on the questions raised in the issues paper, the deadline for submission is 31 March 2022.
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