Modernising tax administration
Tax Alert - August 2018
By Virag Singh
As we briefly highlighted in the July 2018 Tax Alert the Government has introduced a new tax bill with some important changes to certain aspects of tax administration. The Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill (the Bill) proposes changes to some core aspects of the Tax Administration Act 1994 (the Act). These proposals have their origins in the discussion document issued in December 2016, Making Tax Simpler – Proposal for modernising the Tax Administration Act (the Discussion Document). You can read our July 2017 Tax Alert for more detail on the changes as originally proposed in the Discussion Document.
The key changes/proposals are discussed below.
The changes are proposed to come into effect from the date of enactment of the Bill.
The Commentary to the Bill (the Commentary) notes the adoption of the OECD’s “right from the start” framework, which suggests a proactive approach to tax administration. This framework is stated as the basis to make tax compliance simpler, particularly for the small business sector. The essence of the framework is that the tax administration system should actively facilitate accurate upfront compliance on the part of taxpayers, so as to reduce the need to make subsequent reassessments and the resulting burden that this imposes on both taxpayers and Inland Revenue.
The Bill introduces changes to allow the Commissioner of Inland Revenue (the CIR) to make short-process rulings. The key features of this proposal are:
- A person with annual gross income of $5m or less and a question involving tax below $1m can apply for a short-process ruling;
- Removal of the usual requirements when applying for a binding ruling to state the taxation laws and propositions of law for which the ruling is sought; and
- Application and hourly rates (as determined and published by the CIR) will be lower for short-process rulings compared to the current rates, which are $280 (plus GST) for the initial application fee and $140 per hour (plus GST) for further fees.
The application for a short-process ruling will have to be in a prescribed form. The other requirements for obtaining a ruling or obligations on Inland Revenue when considering a ruling application would largely mirror the current rules for private rulings.
Extending the scope of binding rulings
Changes are being proposed to extend the scope of the binding rulings regime (which will include the new short-process rulings regime).
The Commentary acknowledges that the current rulings regime was designed with complex transactions in mind, which is why it was restricted to “arrangements” and largely legal rather than fact-based questions.
The proposals will:
- Allow rulings to be made on a taxpayer’s purpose, for example, whether the taxpayer had the purpose of selling a property at the time the property was acquired;
- Allow for rulings to be made on factual matters rather than just arrangements. This includes, for example, rulings on whether a person is tax resident in New Zealand or has a permanent establishment in New Zealand, whether an item or property is trading stock or revenue account property etc.;
- Allow for rulings to be made on matters relating to financial arrangements for which the CIR can currently only issue a determination. These matters are:
- Whether an amount is solely attributable to an excepted financial arrangement;
- The use of certain spreading methods;
- The value of certain property or services; and
- Clarify the difference between an assumption and a condition, and when a ruling ceases to apply because a condition or assumption is breached. In particular, the Commentary notes that the term “assumption” is replaced with the term “condition”, as this is more reflective of market practice.
These are welcome changes to the binding rulings regime. In the current climate of uncertainty in terms of how Inland Revenue investigators interpret tax laws, frequent legislative change and fewer substantive tax cases progressing through the courts, these changes should (at least in theory) make the binding ruling process more flexible and accessible.
However, in their current form, there is a risk that the proposals may not achieve their intended outcome.
The Commentary notes that the main problem the Bill seeks to address is that in practice rulings are only available to large taxpayers and that SME taxpayers are priced-out because of advisor costs and Inland Revenue fees. However, the short-process rulings regime is targeted at taxpayers with an annual turnover of less than $5m and a tax question involving tax of less than $1m. At a practical level, these changes would only be applicable to mostly the “small” component of New Zealand’s SME sector. The new regime therefore would not be accessible to a significant number of mid-market businesses. Unfortunately, unless there are material changes to the thresholds proposed as part of the consultation process, the changes would not address the main problem identified in the Commentary.
The CIR has not yet prescribed fee levels for short-process rulings. However, given that a complete legal analysis would be included in preparation of the ruling application by the relevant tax advisor, and based on the proposed truncated form of ruling application, taxpayers should expect substantial reductions in time and fees charged by the CIR for the applications.
Disappointingly, post-assessment binding ruling applications are not proposed in the Bill. We strongly recommend that this is considered by the Officials as part of the consultation process. Admittedly, this would not be a simple issue given that careful consideration would need to be given to interaction with, for example, the disputes resolution process. Nevertheless, in light of the cumbersome and expensive disputes process and the significant taxpayer burn-off that comes with it, we recommend that consideration should be given to introducing this change.
A final observation is that, assuming the $5m / $1m thresholds are increased as noted above - which should make the regime available to a bigger range of SME taxpayers - the key challenge for Inland Revenue would be having adequate resourcing to meet the demand for more rulings and the ability to turn around these rulings in a timely fashion.
The changes propose to repeal section 113A of the Act and enact a replacement that will allow taxpayers to:
- Automatically include an error in a subsequent return if total errors for the return (for income tax, GST or FBT) are equal to or less than the current threshold of $1,000; and
- Make an adjustment in a subsequent return for income tax or GST (but not FBT) if the total errors in the original return are equal to or less than $10,000 and 2% of the taxpayer’s taxable income or GST output tax liability.
Care and management
The Bill proposes changes to extend the CIR’s care and management powers by providing tools to address “legislative anomalies”. Legislative anomalies will be a defined term, but broadly will mean an unintended outcome caused by gaps or inconsistencies in the legislation that do not reflect the clear policy intent of a provision. In cases of legislative anomalies, the tools would provide an interim/temporary solution to allow taxpayers to adopt an approach that is consistent with the intended policy outcome until a legislative fix is enacted.
The proposed tools to deal with legislative anomalies are:
- An Order in Council as recommended by the Minister of Revenue;
- A binding determination by the CIR; and
- An administrative action by the CIR.
The application of these tools to modify the application of the law will be limited to groups or classes of taxpayers (rather than for a particular taxpayer). The modifications would apply for a period of not more than three years during which the CIR must determine if legislative change is required.
In recent times there has been a significant volume of new and complex tax bills introduced and enacted. While these tax bills have gone through a consultation process, this process has arguably been relatively short given the complexity of the relevant subject matter. This has resulted in heightened risk that that the drafting of the legislation has not produced the intended policy outcome. In this respect, the above changes to address such legislative anomalies are helpful.
However, there are important matters that will need to be addressed as part of the consultation process:
- Whether the administrative action by the CIR will be binding on her. Currently administrative policies published in the CIR’s statements, guidelines etc. are not binding on her. Given the significance of the tax administration issue that the CIR is seeking to address, it is important that the administrative action is binding on the CIR.
- Following on from the above point, taxpayers should have protection from penalties and use of money interest to the extent they apply the measure implemented by the CIR.
- It is quite restrictive to limit the ability to modify the application of a tax law to groups or classes of taxpayers. If there is a legislative anomaly, the CIR must be able to fix the anomaly regardless of whether it affects one taxpayer or a group or class of taxpayer. Knowingly not fixing a legislative anomaly just because it affects only one taxpayer would not be consistent with the CIR’s care and management function (and of course it is possible that more than one taxpayer may be actually affected).
Information collection, use and disclosure
Changes are proposed to the information collection, use and disclosure rules under the Act. The changes mostly rewrite the existing rules to make them clearer and more navigable. There are however, some substantive changes proposed which we have briefly referred to below.
Other than reordering of the current information gathering powers under section 16-19 and 21 of the Act, the Bill introduces a new regulation-making provision for collection of bulk data on a regular basis where that collection is necessary or relevant for revenue purposes. This provision will be the subject of a number of safeguards.
This proposed amendment provides an express clarification that information gathered for one revenue purpose can be used for any other revenue purpose. The Commentary reasons that, if enacted, this would assist the CIR in exercising her care and management responsibility, which requires her to make the most efficient use of the information at her disposal in order to fulfil her various functions and responsibilities.
Confidentiality and exceptions
Inland Revenue is currently required to maintain the secrecy of “all matters relating” to the Inland Revenue Acts. Under the proposal, the confidentiality rule would be amended to focus on information about, or relating to, taxpayers. In particular, the new rule would cover “sensitive revenue information” which is defined as information that:
- identifies or could identify a taxpayer, directly or indirectly;
- might reasonably be regarded as private, commercially sensitive, or otherwise confidential; or
- the release of which could result in loss, harm or prejudice to a person to whom it relates.
The exceptions to the confidentiality rule are being reordered into new sections which will contain the overarching framework for the exceptions, now called “permitted disclosures”. Further details of each broad category of exception will be contained under the new schedule 7 of the Act.
Changes are proposed to enable the sharing of information for the provision of public services. The Commentary notes that while a considerable amount of cross-agency sharing is allowed, there is no readily apparent consistent principle governing the sharing of confidential information for the provision of public service. The amendments are aimed to make such information sharing more flexible, principled and transparent. The information sharing arrangements would be entered into in three alternative ways:
- An approved agreement under Part 9A of the Privacy Act 1993;
- An agreement between agencies where consent will be obtained from the taxpayer; and
- Regulation, made by Order in Council.
The changes to the information use, collection and sharing provisions are mostly for the purposes of clarity, with no intended substantive change.
The changes to the tax secrecy rules to cover “sensitive revenue information” rather than “all matters relating to” the Inland Revenue Acts is interesting. An issue that has frustrated tax advisors is the refusal of the CIR to release decisions of the Disputes Review Unit (DRU) on a redacted basis with the CIR relying on the secrecy provisions as the reason not to do so. Given the proposed definition of “sensitive revenue information”, it is arguable that the CIR should have the flexibility under the proposed changes to issue decisions of the DRU on a redacted basis. This remains to be seen.
August 2018 Tax Alert contents