Tax is changing - for everyone
Tax Alert - March 2019
By Susan Wynne and Emma Faulknor
The transformation programme of Inland Revenue to modernise the tax system continues and changes taking effect in April this year will include a new year-end process that will impact all individual taxpayers. To clarify, an individual taxpayer is a natural person, that is, you or me but not a company, trust or other type of entity.
The Government intends to simplify individual taxpayers’ filing obligations and ensure that the appropriate rates of tax are deducted throughout the year. For individuals that only earn salary and wages or investment income it is intended that Inland Revenue will work out whether they have a refund or tax to pay after the end of the year. The Personal Tax Summary (PTS) that many individuals will have requested in the past will no longer be provided. This will apply from the tax year ending 31 March 2019.
These changes are dependent on the passing of legislation in the Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill, which is currently before the Committee of the whole House. It is also dependent on the processes in Inland Revenue’s new computer system START (which stands for Simplified Tax And Revenue Technology). The go-live date for income tax data and processes to be available in the new system is 26 April 2019.
In our article earlier this year, we discussed the changes to Inland Revenue’s collection of employment income information from payday reporting. Inland Revenue will be using the information they collect to pre-populate individuals’ income tax information.
The frequency of reporting investment income, such as interest and dividends, is also set to increase and this will assist Inland Revenue in pre-populating individuals’ income tax information. The changes to the reporting of investment income are optional from April 2019 and become mandatory from April 2020. The due date for interest income reporting for the 2019 and 2020 years has been moved forward from the traditional 31 May due date to 15 May until investment income information is received monthly from 1 April 2020.
The new online services provided by Inland Revenue via myIR are intended to make it easier for businesses to meet the new reporting requirements. These changes will allow IR to have a more real-time view of taxpayer’s obligations. These types of income on which information will be collected regularly are referred to as ‘reportable income’.
Automatic tax square up
Under the proposals, individuals will fall into one of three groups for operational proposes that will determine the level of information they are required to provide to Inland Revenue. It will be possible for a person to move between the groups in different income years. Inland Revenue will use current year income information along with previous returns and personal tax summaries to determine what additional information is needed and whether to automatically calculate the taxpayer’s assessment.
The first group will generally include people who only earn income that is reported to Inland Revenue throughout the year, such as PAYE deducted income or investment income. If Inland Revenue judges the information to be correct it will automatically generate a tax refund or tax obligation. The taxpayer will not have to interact with Inland Revenue as was required in the past. Refunds are intended to be paid by direct credit and individuals will just need to make sure their contact details and bank account are up-to-date with Inland Revenue.
A key issue here is if there is other income to report for a particular year when an automatic tax refund is generated. Officials recommended changes to the legislation for the year-end process so that taxpayers treated as solely earning reportable income have until terminal tax due date to make an amendment to their automatic assessment without interest or penalties being imposed, unless they are subject to the provisional tax regime. Individuals will also be able to notify Inland Revenue via myIR if they expect to begin earning other income so their tax position isn’t automatically calculated.
Based on figures released by Inland Revenue, it is expected that approximately 1.67 million people will automatically receive a tax refund for the 2019 tax year. This will include 950,000 people who had previously applied for and received a refund and also 720,000 people who had not previously received a refund. It may be less agreeable if you are part of the approximately 115,000 that are expected to have additional tax to pay for the first time. This number is expected to decline as Inland Revenue targets taxpayers to make changes during the year to ensure the correct of amount of tax is paid during the year so year-end tax debt is minimised.
There will be some concessions to year-end tax debt. For example, if the tax to pay is $50 or less and relates to income of $200 or less which should have had tax deducted under a withholding regime then the tax may not have to be paid. This will include employment income, dividend and interest income which should have had PAYE or resident withholding tax (RWT) withheld.
Do I have to provide additional information?
The other two groups of taxpayers will be required to provide additional information to Inland Revenue. Those taxpayers categorised in the second group will have to provide or confirm some additional information whereas those in the third group will have to provide income information similar to the current IR 3 process. The categorisation is based on the level of additional information required but will include people who earn only some or no reportable income.
Taxpayers will have access to this information online via myIR. The website will show income details which have been pre-populated by Inland Revenue based on payroll information. MyIR will also show the income categories Inland Revenue associates with you, for example rental income, based on previous returns filed. Investment income will also be visible once those provisions come into force but until then individuals will need to provide this information to Inland Revenue.
An individual and their tax agent (if they have one) will be able to update the information held by Inland Revenue via myIR. For example, provide details of rental income, overseas income or tax deductions.
Essentially, if you currently file an IR 3 you will still be required to disclose similar information to Inland Revenue. The process may be simplified though where information such as salary and wages can be pre-populated by Inland Revenue.
How does Inland Revenue know what my correct tax rate is?
Currently an employer deducts PAYE based on the information provided by the employee. Inland Revenue only advises the employer to change the tax rate where they have information that the rate applied is incorrect. Inland Revenue does not suggest a more suitable tax code where one is available. We note a person who earns PAYE income can be on an unsuitable tax code without it being incorrect. This means in some situations, an over or under payment of tax will arise which previously was settled under the PTS/IR 3 process.
Under the proposed changes, Inland Revenue will notify taxpayers who earn PAYE income if there is a more suitable tax code. Recognising that the ultimate decision rests with the taxpayer, the individual does not have to accept the suggested tax rate but Inland Revenue will notify the employer if they do.
This same monitoring will also apply to investment income. However Inland Revenue will instruct the payer to update the withholding tax rate applied to investment income where the individual accepts or does not respond to Inland Revenue’s suggestion.
Tailored tax code
Where a person has two sources of PAYE income, they are currently required to use a secondary tax code or apply for a special tax code. Because of the nature of New Zealand’s progressive personal income tax rates the use of a secondary tax code frequently results in overpayments of PAYE and, to be fair, most people either are not aware they can apply for a special tax rate or are unable to estimate their income for the year to apply for one. To overcome these issues, the Government has proposed a tailored tax code process effective from 1 April 2019. Inland Revenue will introduce an online application process and proactively recommend tailored tax rates to individuals.
How do I claim my donations rebate?
The administration of donation tax rebates is also changing. From April 2019 Inland Revenue will accept donation receipts uploaded electronically via myIR. A taxpayer may no longer have to file a tax credit claim if they upload donation receipts during the year, as Inland Revenue will automatically issue a refund where they consider the person is entitled to the refund. Inland Revenue will consider things such as whether a valid donation has been made to a charitable organisation and the taxpayer’s taxable income exceeds the donations made in the claim.
This new approach is not compulsory for taxpayers. A person may complete the donation section when providing other income information in myIR or still complete a separate tax claim form either online or in paper form. If you have a tax agent, they can complete this for you on your behalf.
What if I don’t have a myIR account?
Once income tax is live in the START system taxpayers will be encouraged to use myIR to check whether they will receive a refund or have tax to pay and update their details, rather than contact Inland Revenue. Inland Revenue acknowledges that not all customers are able to, or want to, use its online services and has confirmed that it will keep other channels of communication, including mail and telephone, open so taxpayers can meet their tax obligations.
We note Inland Revenue have announced they will temporarily shutdown from the afternoon of 18 April 2019 until the morning of 26 April 2019 to update their systems for these changes. This covers the Easter and Anzac day public holidays so will only impact three working days to minimise disruption to taxpayers.
The changes to individuals’ filing obligations apply to the year ending 31 March 2019 and will replace the existing personal tax summary and income tax return filing processes. Given some of the fundamental changes involved we can only hope Inland Revenue systems can cope and that Inland Revenue will have sufficient resources to manage the increased activity.
March 2019 Tax Alert contents
- Taxing your Airbnb and family bach
- Changes for residential rental owners from 1 April 2019
- How will a CGT affect your lifestyle block or home office?
- The Commissioner can't have her cake and eat it too...
- Interim digital services tax to be implemented ahead of OECD work
- A Snapshot of Recent Developments