Comment
Officials welcome the general consensus in favour of aligning RWT rates with the personal tax rates that are now in place after recent tax cuts (12.5%, 21%, 33% and 38%). Alignment will ensure that compliance costs for taxpayers and administrative costs for Inland Revenue are reduced, as individuals will be able to select the RWT rate that corresponds with their marginal tax rate.
Recommendation
That the submission be noted.
Issue: Default RWT rate
Submission
(3 – New Zealand Bankers’ Association, 10 – KPMG, 6 – Corporate Taxpayers Group, 5 – New Zealand Institute of Chartered Accountants)
The default RWT rate that applies where an interest recipient does not elect a rate should be 21%. This is because it will ensure the greatest accuracy in terms of taxing the highest proportion of individuals at the correct rate and ensure the lowest compliance costs. (KPMG, New Zealand Institute of Chartered Accountants, Corporate Taxpayers Group)
12.5% is not an appropriate default RWT rate. (KMPG, New Zealand Institute of Chartered Accountants)
At the most, the default RWT rate should be 33%. (Corporate Taxpayers Group)
The New Zealand Bankers’ Association supports the default rate of 38% for new accounts. However, the proposed 38% default rate should only apply to new accounts that are opened after 1 April 2010. The proposed shift to 38% on 1 April 2011 should not take place. Instead, a legislative requirement should be imposed for deposit account holders to elect an RWT rate that aligns with their marginal tax rate. The deposit account holder should be required to change their RWT rate where the rate no longer reflects the account holder’s marginal tax rate. Such an approach could be supplemented with the proposed requirement for banks to remind customers to ensure that their RWT rate is aligned with their marginal tax rate on annual resident withholding tax certificates and work by Inland Revenue. (New Zealand Bankers’ Association)
Comment
Default rate for new bank accounts
Officials maintain that the default rate for new bank accounts that are opened from 1 April 2010 should be 38%. The rationale for this approach is that it provides an incentive to taxpayers to select the RWT rate that is appropriate given their marginal tax rate.
Shift of existing bank accounts to 38% default rate from 1 April 2011
Officials agree with submitters that existing bank accounts should not be shifted to a 38% default rate from 1 April 2011. This is because of the substantial number of contacts that banks will have within a short period of time as a result of moving a large number of customers to the new default rate on 1 April 2011. Additionally, Inland Revenue expects that a large number of extra personal tax summaries and contacts will arise from this proposal. Furthermore, a number of individuals who will be shifted to the 38% default rate would be permanently over-taxed under the current proposal, as they will in fact have a lower marginal tax rate (i.e. 12.5%, 21% or 33%).
Officials instead support an alternative proposal that arose from consultation with submitters. This would involve a more targeted approach with respect to taxpayers who should be on the 38% RWT rate but are on a lower rate. This would involve Inland Revenue identifying individuals who are on the 21% RWT rate but who should be on 38% and instructing interest payers (initially, the major banks) to shift those individuals to the appropriate rate. This would work by the banks providing Inland Revenue with information on customers’ tax file numbers and elected RWT rates. Based on information about taxpayers from employer monthly schedules, Inland Revenue would send back “amended” information to the banks on an annual basis. Inland Revenue would also send letters to affected individuals, informing them of this action. As with the current proposal, individuals who are shifted up to 38% would still retain the ability to elect down to a lower rate.
A similar approach is already used by Inland Revenue in relation to secondary tax codes, where it may instruct employers to use a particular PAYE tax code for an individual taxpayer.
Recommendation
That the submission be accepted subject to officials’ comments.
Issue: Electing RWT rates
Submission
(11 – Ernst and Young)
Individuals should retain their ability to freely choose between the 21%, 33% and 38% rate and not be required to choose a “correct rate”.
Comment
Individuals who are shifted up to a higher RWT rate due to Inland Revenue notifying their interest payer under the alternative proposal would still have the ability to subsequently elect another rate. However, officials note that individuals who do elect back down will likely be identified by Inland Revenue as being on an inappropriate rate the next year and again shifted up to the RWT rate that corresponds with their marginal tax rate.
Recommendation
That the submission be accepted subject to officials’ comments.