Making Tax Simpler: A New Tax Administration Act
Tax Alert - February 2017
By Robyn Walker and Rebecca Osborn
As kids are all returning to start a new school year and dreading upcoming Shakespearian reading assignments, the tax community has its own summer reading project with a looming deadline. Just before Christmas the latest and seventh chapter of “Making Tax Simpler” was released. At 93 pages Making Tax Simpler: Proposals for modernising the Tax Administration Act: A Government Discussion Document (the discussion document) is tough going and could suffer a bad case of TL;DR (urban slang for “Too long; didn’t read”).
Fortunately we’re providing you with a summary of the key points of the document, while also trying to not have this article labelled as TL;DR.
The purpose of the discussion document is to provide greater details of the Government’s proposals towards a new Tax Administration Act (TAA), having released an earlier discussion document on the same topic. While it would be easy to write the discussion document off as a bit of a bore, it’s important to remember that the TAA outlines the fundamental rights and obligations of taxpayers and provides Inland Revenue with expansive powers to collect information and impose penalties.
A key theme running through the proposals is greater flexibility. More discretion for the Commissioner, greater use of regulations, wider powers of information collection and sharing. Overall we think these are positive changes for the tax system. The current TAA is restrictive and often hampers the smooth and efficient administration of our tax system.
There are some real wins for taxpayers in these proposals. We outline below some of the major proposals to be aware of.
The role of the Commissioner of Inland Revenue (the Commissioner)
The current TAA charges the Commissioner with responsibility for the care and management of the tax system. As part of this responsibility, the Commissioner’s duty is to collect the highest net revenue over time. This allows the Commissioner discretion in how she collects tax if overall it will be beneficial to the tax system, for example by encouraging voluntary compliance. Inland Revenue has come under criticism in the past for how narrowly these provisions have been interpreted. Many have argued the Commissioner’s care and management responsibilities allow the Commissioner to apply the tax law as the policy intends, despite errors or gaps in legislation, however the Commissioner does not see her current powers as extending this far.
A common theme from submissions on the first discussion document was that there is a need for the Commissioner to have greater flexibility in the application of the law but that this shouldn’t be at the expense of transparency in her decision making. The discussion document outlines proposals to extend the care and management powers to allow the Commissioner greater administrative flexibility in limited circumstances. These include where minor legislative anomalies are discovered, where a strict interpretation of the legislation would be contrary to long-established practice of both the Commissioner and taxpayers or where the result under the law would create inequity to a broad group of taxpayers.
This is a very welcome proposal. Taxpayers have long been frustrated by situations where everyone is in agreement that the law is broken or doesn’t quite work as intended, yet the Commissioner has felt constrained to a strict interpretation of the tax acts. Greater flexibility for the Commissioner does raise a natural concern of whether such a power could be abused. In this regard, instead of a blanket criterion that the discretion could only be exercised in a way that is taxpayer favourable, it is proposed that taxpayers would be able to choose whether to apply any care and management decision to their particular circumstances. This is a clever solution, and is consistent with one of the overall goals of the Business Transformation programme to empower taxpayers to take control of their tax obligations. Additional safeguards are also proposed, such as a three year time limit before legislative amendments are required.
Further, under the role of the Commissioner it is proposed to make greater use of regulations for tax administration processes. This is also a positive change as the current TAA often constrains Inland Revenue’s ability to just get the job done.
An integral part of the current TAA is the obligation on the Commissioner to keep information collected secret and to only use such information for tax purposes. This is a key pillar in New Zealand’s system of voluntary tax compliance and self-assessment. However, the cliché that information is power has never been truer and there is increasing pressure on Inland Revenue to share information with other government departments and agencies. A major component of the Government’s Better Public Services initiatives is the wider and smarter use of data held by the government.
While Inland Revenue does already share some information with other government agencies, the Government’s aim is to modernise the rules to better allow for sharing in the future while maintaining taxpayer confidentiality. The Government is proposing to replace the existing “tax secrecy” rule with a rule that Inland Revenue must keep confidential information that relates to the affairs of, or identifies a taxpayer. The intention is that this will protect sensitive taxpayer information but allow for the release of generic, not-taxpayer-specific information. It is also contemplated that some taxpayer specific information should be shared across agencies when it is in the interests of the public good, such as ensuring people receive their correct entitlements from the government. It is not intended to limit the government agencies that are able to obtain information from Inland Revenue, however, there will be a safeguard in place that the agency must be able to lawfully collect the information it its own right.
There has been a slow erosion of tax secrecy over the last few years and the changes proposed are a continuation of this. For the majority of taxpayers these may be welcome proposals as increasingly citizens expect greater co-operation between government agencies to maximise efficiencies and reduce duplication of effort.
Continuing the theme of the power of information, it is proposed that the new TAA will include a provision that allows for the making of regulations covering the repeat collection of external data sets. While the Government’s view is that Inland Revenue’s existing data collection powers are working well, greater powers are required to access large third-party data sets. It is envisaged that the collection of such information would assist Inland Revenue in pre-populating returns and also be used for education and tax compliance purposes.
From an integrity of the tax system point of view, this is a positive change. It has been estimated that the “black economy” in New Zealand (i.e. income not reported to Inland Revenue) could be in the vicinity of $10 - $20 billion dollars annually. Greater access to information and the use of analytics should assist Inland Revenue to identify these tax dodgers. However, information isn’t free and businesses will have to wear the costs of providing additional information to Inland Revenue.
The role of taxpayers
New Zealand’s tax system is built around a concept of self-assessment. Where it is ultimately determined the original self-assessment was incorrect there are a series of formal processes that must be followed to amend the assessment. Significant resources are also employed in Inland Revenue’s audit function to assure compliance. Inland Revenue’s evolving approach to tax compliance is shifting away from that traditional audit model and towards helping taxpayers “get it right from the start”. A key way Inland Revenue hopes to achieve this is by interacting earlier with taxpayers and to provide advice and certainty through these interactions. Proposals outlined in the discussion document to facilitate this include:
- Expanding the scope of the binding rulings regime;
- Significantly reducing the fees for obtaining a binding ruling, particularly for SMEs; and
- Allowing for post assessment binding rulings.
The proposals will also empower taxpayers with a wider ability to self-correct errors – currently taxpayers can only self-correct errors under $500 (soon to be increased to $1,000). The Government is proposing to increase this amount to the lower of $10,000 and 2% of their taxable income or output tax for the relevant period. This is a really positive step and should minimise compliance costs for a number of taxpayers, particularly SMEs. That said, the amount is still too small to be meaningful for larger organisations.
Submissions can be made on the discussion document until 24 February 2017. If you have any questions regarding the discussion document, or would like to make a submission, please contact your usual Deloitte tax advisor.
February 2017 Tax Alert contents