Tax System set for major overhaul in modernisation project
Tax Alert - April 2015
On 31 March 2015, the Government issued the first two of nine discussion papers for public consultation on “looking towards a better tax administration system for New Zealanders”.
The scale and size of this project means that over the next few years, the tax system is in for a huge shakeup which will impact on everybody in some shape or form. The project is far more than just updating the Inland Revenue’s computing system. The Government describes it as a “once in a generation opportunity” to make changes to meet current and future needs.
The first document is a green paper on tax administration which provides the overall direction of the tax modernisation programme and seeks feedback on that direction. As this is a green paper, there are no firm proposals at this stage; instead the paper simply notes areas which could be explored in more detail.
Underlying the thinking is the assumption that key base taxes will remain substantially in place, that New Zealand will continue with its broad-base low rate approach and that social policy and other non-tax functions (e.g. KiwiSaver, Working for Families, Student Loans repayments and Child Support) will continue to be administered by Inland Revenue.
There will be a move towards relying on technology and existing business systems in order to meet tax obligations. Overall the system should:
- Be simple and easy for customers to get right, hard to get wrong
- Be quick and low effort to use
- Provide more certainty
- Not require duplication of effort by customers and associated third parties
- Be flexible enough to move with technology developments.
Reducing compliance costs, in particular for small and medium enterprises (SMEs), is an important goal. In this regard, the Government is conscious to not shift costs away from government to taxpayers, nor opt for simplistic options which produce high distortionary costs. The Government is also not about to provide tax concessions to SMEs, as providing tax breaks for a particular sector is likely to reduce economic efficiency and growth. The paper notes that providing too many options for paying tax encourages SMEs to calculate a tax liability several different ways in order to find the lowest tax payment – which conversely increases compliance costs. There is also a desire to not have tax rules that create boundaries and disincentives for successful firms increasing in size.
Overhaul of the PAYE system
The collection of PAYE from salary and wage earners is a very important part of tax administration. The paper notes that the PAYE rules have not been fundamentally reviewed since being introduced in 1957. The PAYE system will be reviewed to ensure it is fit for purpose in a future where calculations are in most cases likely to be done by software and not manually.
Specific areas that have complexity or which need clarification include extra pay calculations, holiday pay calculations, PAYE obligations for IR 56 payers, employer superannuation contribution tax, secondary tax codes and other flat PAYE codes.
It is suggested that a review could consider all forms of employment remuneration and how they should be taxed. For example, should fringe benefits, employer superannuation contributions and employee share schemes be incorporated into the PAYE rules? Should the review cover how the PAYE rules apply to cross-border relationships and to employment of workers resident in a foreign jurisdiction?
Reforms in this area will need to be carefully thought through to avoid large up-front costs that outweigh the benefits.
It has also been some time since the scope of the schedular payment and withholding tax rules and tax rates have been reviewed. There are currently issues of non-compliance and inconsistency regarding the tax rules that apply to certain industries for self-employed persons, migrants and some contractors. The Government sees this as an opportunity to expand withholding and/or reporting without significantly increasing compliance costs. In this regard, a review will likely consider taxes in situations similar to employment, such as independent contractors and whether withholding at source can be considered in a wider range of situations. A careful watch will need to be kept on any new proposals to ensure there is in fact no additional compliance for employers in meeting new rules where the scope is extended.
Separate discussion documents on PAYE and withholding tax on labour income will follow later this year.
The document states that initial feedback suggests that the calculation and payment of provisional and terminal tax currently presents a number of problems. These include the use of money interest risk, the need to estimate annual tax liabilities part-way through a year of assessment, compliance costs associated with estimating liabilities and cash flow difficulties with the terminal tax square up process, particularly for new businesses. Ideas put forward to address these concerns include:
- A type of business PAYE where the calculation and payment of business income tax is done more on account as income is earned - akin to PAYE. This might be achieved by using interim accounting calculations and innovative third-party accounting/tax software. For small businesses, provisional tax payments might be made based on a percentage of a business’s turnover. The finer detail will be necessary to determine whether this will in fact be easier than the present options.
- Options to mitigate use-of-money (UOMI) interest issues could include providing safe-harbour rules for taxpayers using a new payment calculation as discussed above or increasing the monetary threshold (currently $50,000) for those using the standard uplift option.
- The safe harbour limit could be extended, the standard uplift method could be reviewed and UOMI rates could be re-considered. This latter point may be music to some ears as many have long campaigned for the UOMI rate on overpayments to be reviewed.
- Tax pooling might be reviewed to see if the rules can be improved and or made available to more taxpayers. Currently only the very large taxpayers tend to use tax pooling to mitigate use of money interest charges.
Currently the focus is on a one-size fits all approach when it comes to collecting tax information and associated disclosures. The document explores placing more emphasis on providing key information in a digital form in a way that suits the size and nature of the individual business and the Government. Potential changes include using digital technology to rationalise current tax returns, use businesses’ existing processes and systems to make it easier to provide information to Inland Revenue and introduce a differential reporting approach for the company tax return in line with the recent changes to the financial reporting requirements.
Micro and small businesses
A specific option could be explored to encourage micro and small businesses to use accounting software that meets Inland Revenue standards which help correctly classify transactions for tax purposes. The penalties regime could be amended to focus more on systems and processes so that customers are encouraged to use accounting software in order to remedy system faults that give rise to shortfalls.
A discussion document on business taxation covering provisional tax and the provision of information is planned for late 2016.
Resident withholding tax
Resident withholding tax (RWT) is in effect a PAYE system for collecting tax on payments of domestic interest and dividends. Current problems include slow and inaccurate annual systems, high administration and compliance costs, duplication of compliance, a lack of timely information about the dividend payments that are made and the too-easy ability for taxpayers to select an incorrect RWT rate on interest payments. It is planned that a review of RWT will occur once the PAYE review is completed. A specific discussion document on this is planned for release in 2016.
The filing rules for individuals were changed in the late 1990’s to simplify tax and remove the requirement for most individuals to file tax returns where their only income was salary and wages which was subject to PAYE deducted at source. Initially this worked well, but since 2000 there has been a steady increase in those choosing to file in order to claim tax refunds (and not filing where there is not a refund – i.e. “cherry-picking”). A whole industry of service providers has sprung up in the last ten years to provide such a service. There has also been an increase in the numbers of individuals that are required to file returns arising from the need to return, for example, rental income or losses, foreign income, interest or dividend income above certain thresholds and secondary income. Further, some in this last category are not aware of the obligation to file. All of which means the filing system for individuals is in for an overhaul.
It is envisaged that there will be a move to an electronic filing system that is pre-populated by timely and accurate withholding systems. The majority of customers would then only be required to check, confirm details and report unlisted income (such as overseas or rental income). In most cases square-up amounts of tax would be dealt with by either refunds being automatically released or debts paid by automatically adjusting withholding rates on future income sources.
Better digital services
The second paper released is about how Inland Revenue can use technology to improve services and reduce compliance costs. Although Inland Revenue has moved to embrace new technology in recent years (Voice ID, website, mobile apps, text, email, software-enabled filing, social media etc.) there are still current limitations. The main problem is that the current digital offerings exist as stand-a-lone services and are not integrated with other activities that customers carry out, or with other government services. The document cites common complaints including difficulty in accessing information, finding the processes time-consuming, using multiple channels to undertake one interaction, uncertainty about whether they have done the right thing and frustration at the lack of information sharing.
It is foreseen that businesses will only need to interact with their accounting software to meet obligations. For example, for businesses that already use a computerised payroll system, PAYE filing could be integrated into their payroll accounting software removing the need to deal with PAYE filing obligations separately.
Underlying the thinking is the acknowledgement that customers vary, no one size fits all and that a package of services will need to be designed that keeps pace with technology changes. It is further acknowledged that some customers will not be able to adopt digital services, but there are other groups that can but choose not to. For example, the paper asks whether employers and tax agents who choose not to use digital filing should be the first group to be required to use digital services. It is expected that customers will voluntarily move to using digital services if Inland Revenue gets the offering right.
Finally, the tax administration rules regarding the methods of communication and timing of returns and payments are likely to be reviewed for the digital age given the rules were originally designed for a paper era.
Successive governments have grappled with how to make the tax system simpler and reduce compliance costs. However, this project is not just tinkering at the edges and significant policy resource has been thrown at this. This Government needs to be commended for standing back and taking a good look at how tax is administered in the 21st century. There are obviously significant benefits for the Government by using technology to transfer information automatically, to reduce non-compliance and generally shore-up the tax system in the process. While an underlying objective is to not simply move compliance from government to businesses, there is a very real risk with some of these proposals of doing just that. Some of the technology changes could mean large up-front costs for businesses in adapting or purchasing software. There is also the need to balance the big brother factor of digital services with the benefits that it brings for taxpayers - such as less interaction with Inland Revenue, a reduction in compliance costs (in the long run) and more time for doing the more important stuff in life.
We’ve only scratched the surface in providing this overview. There is a lot to digest in these documents and therefore it is important to get involved in the consultation process if you have views on this. The documents are available here. In the spirit of the digital age, submissions are encouraged to be made online at: makingtaxsimpler.ird.govt.nz or by email. For the technology challenged, submissions can still be sent by post. The closing date for submissions on the green paper is 29 May 2015, whereas the closing date for submissions on the digital services paper is 15 May 2015. If you have thoughts or wish to discuss further, please contact your Deloitte advisor.
April 2015 Tax Alert contents