Tax pooling accounts and their use
Issue: Time period to access tax pooling funds following a reassessment
Clauses 405 and 407
Submission
(12 – Chapman Tripp, 35 – PricewaterhouseCoopers, 45 – Tax Management New Zealand, 67 – New Zealand Institute of Chartered Accountants)
The bill extends the tax pooling rules to include the financing of additional tax payable as a result of a reassessment of tax (including voluntary disclosures) and the resolution of a dispute. The bill allows taxpayers 60 days from the date the Commissioner issued an amended assessment to access funds from a pooling intermediary. The 60-day period is adequate for reassessments of income tax but the submitters consider that the 60-day period does not adequately cater for situations when the taxpayer initiates dispute proceedings.
The submitters recommend that for disputes, the 60-day period should begin from the date the dispute between the Commissioner and the taxpayer is resolved.
Comment
Officials agree that the legislation as drafted does not provide the right policy outcome in cases of dispute between the Commissioner and the taxpayer. In these situations there may be a significant amount of time (maybe even years) between when the Commissioner issues an amended assessment, which is then disputed by the taxpayer, and resolution of the dispute.
Officials recommend that sections RP 17B(3)(v) and (5), be amended and a new provision inserted (section RP 17B(6)) to enable taxpayers who have resolved a dispute and owe additional tax to access funds from a tax pooling intermediary within 60 days from the date the dispute is resolved.
Recommendation
That the submission be accepted.
Issue: Resolution of a tax dispute
Clause 405
Submission
(68A – Corporate Taxpayers Group)
The tax pooling rules should be available for the settlement of any dispute, without restrictions. There can be instances when a dispute arises, but ultimately does not change an assessment. The benefit of tax pooling should be available in this instance.
Currently taxpayers in this situation would have to pay the whole amount of the assessment up-front if they wanted to access tax pooling funds.
Comment
Tax pooling is only available to reduce exposure to use-of-money interest if there is uncertainty over the correct tax liability at the due date.
Taxpayers can access tax pooling funds to pay the original income tax assessed if the funds are accessed within 60 days of the terminal tax due date. If the amount is subsequently disputed, there is no uncertainty over the original amount assessed. Uncertainty only arises over the amount of the altered assessment. Tax pooling will be available for an increased amount over and above the original assessment.
Extending tax pooling to include the original assessed amount could have two results: taxpayers could dispute their assessment before the due date to defer the payment of tax to subsequently reduce their interest exposure by using pooling funds, or extend the tax pooling rules to cover regular payments of other taxes. Both of these results open the scheme up to non-compliance and are contrary to the original intent of the tax pooling rules.
Recommendation
That the submission be declined.
Issue: Extending the 60-day period
Clause 405
Submission
(35 – PricewaterhouseCoopers, 67 – New Zealand Institute of Chartered Accountants)
The bill provides for a 60-day period within which a taxpayer can access funds from a tax pooling intermediary to pay additional tax resulting from a reassessment. The 60 day period is not an appropriate timeframe and should be extended in situations when the taxpayer does not have the immediate financial resources to settle the debt.
Comment
On the resolution of a dispute or issuing of a reassessment, the Commissioner allows a minimum of 30 days (usually 60 days) to make payment before imposing penalties.
The taxpayer will usually know early on in the dispute what their maximum level of exposure is if they lose and have time to obtain finance. Also, disputes can take some time to resolve and therefore tax can be deferred for a significant length of time.
An extension to the 60-day period simply postpones the payment of government revenue. Although allowing further time to arrange finance seems reasonable, it is difficult to distinguish between someone arranging finance and someone who is not complying and is waiting until the last moment to make payment.
Also, the 60-day period for obtaining finance is consistent with the maximum time allowed by the Commissioner for payment following a reassessment.
Officials recommend that the 60-day period not be extended.
Recommendation
That the submission be declined.
Issue: Widening the tax pooling rules to taxpayers other than provisional taxpayers
Clause 405
Submissions
(35 – PricewaterhouseCoopers, 45 – Tax Management New Zealand, 67 – New Zealand Institute of Chartered Accountants)
The proposed section RP 17B(1) currently limits access to the tax pooling rules to provisional taxpayers. With the extension of the tax pooling rules to reassessments of all taxes, references in legislation to the scheme being available only to provisional taxpayers should be removed.
This will also enable any person to deposit money into a tax pooling account, not just provisional taxpayers, and provide a source of funds for tax pooling intermediaries.
Also, the wording of the proposed section RP 17B(2) should be amended to clarify that amounts held in a tax pooling account on behalf of a person may be refunded to the person or sold, or used to satisfy a person’s terminal tax or provisional tax liability or an increased amount resulting from a reassessment, voluntary disclosure, or resolution of a dispute.
The current wording in the bill does not reflect the taxpayer’s right to have the funds refunded or transferred.
Comment
Officials agree with the suggested changes to sections RP 17B(1) and (2), which are consistent with the other changes in the bill.
Recommendation
That the submissions be accepted
Issue: Extending tax pooling to GST and other tax payments
Clause 405
Submission
(44 – Provisional Tax Finance)
The tax pooling rules should be amended to allow taxpayers to access tax pooling funds to pay other tax obligations such as GST.
Provisional Tax Finance has been overwhelmed with enquiries from taxpayers asking if tax pooling can be used for GST payments. They consider they can provide financing to businesses to fund GST payments for up to 60 days for around 12% to 13%.
Extending the tax pooling rules to regular GST payments would help smaller businesses with their cash flow and therefore should be considered on economic stimulus grounds.
The submitter also recommends that the tax pooling rules should be extended to regular GST payments. Provisional Tax Finance considers that access to pooling funds should only be available for up to 60 days after the GST due date.
Comment
The tax pooling rules were introduced to deal with taxpayers’ exposure to use-of-money interest if they are uncertain of their tax liability when they have to make a payment, such as provisional tax. The amendments in this bill extend the tax pooling rules to include other tax payments where uncertainty arises, such as a reassessment of tax or a dispute.
The tax pooling rules were not intended to be used for payments when the quantum of a tax liability is known with certainty at the due date, such as regular GST payments. Extending the tax pooling rules to include regular payments of GST would open the rules up to abuse by non-compliant taxpayers. For example, taxpayers could deliberately not pay GST, knowing that if they are caught they could access tax pooling funds with a backdated effective date, at a significantly lower cost than paying the outstanding GST, penalties and interest cost to Inland Revenue. This would undermine both the penalties rules and voluntary compliance.
Also, once the due date passes, it is difficult to distinguish between compliant taxpayers who are having financial difficulties and non-compliant taxpayers that are trying to reduce their exposure to penalties and interest.
The proposal raised by Provisional Tax Finance is for tax pooling to be extended to regular GST payments. A taxpayer would apply to the pooling intermediary for pooling funds before the GST due date. The intermediary deposits the funds in the tax pool with Inland Revenue at the GST due date. If within the 60-day period the taxpayer pays the intermediary, the pooling intermediary transfers the funds from the tax pool to the taxpayer’s GST account with Inland Revenue at a backdated effective date – the GST due date.
If the taxpayer does not pay the pooling intermediary within the 60-day period, the intermediary withdraws the money from the tax pool. Inland Revenue would then have to begin recovery action for the overdue amount. This is a risk-free transaction for the tax pooling intermediary. If a bank were to lend money to this taxpayer, the bank would bear the risk of non-payment. Under the proposal, the risk from non-payment is carried by the government. Also, Inland Revenue will be 60 days late in beginning recovery action and therefore have a lower chance of collection.
There are other options available to businesses that are having financial difficulties. They could approach a financier before the due date and obtain finance. Alternatively, businesses can enter into instalment arrangements with Inland Revenue before the due date and will only be subject to a 1% penalty plus use-of-money interest.
Further, officials consider that Inland Revenue would not be in a position to implement the amendment proposed by Provisional Tax Finance this year in any event because of resourcing constraints and related systems pressures.
Recommendation
That the submission be declined
Issue: Application date of tax pooling amendments
Clause 406
Submission
(50 – Electronic Tax Exchange, 67 – New Zealand Institute of Chartered Accountants)
To enable the changes to the tax pooling rules to apply as soon as possible, the provisions should be separated from the rest of the bill and enacted separately.
The changes in the bill provide for the transferring of tax pooling deposits between intermediaries. One of the main payments which taxpayers use tax pooling funds to finance is their terminal tax payment. Taxpayers have until the middle of June 2009 to access this finance through their intermediary. If the bill is enacted after mid-June, funds will not be available from some intermediaries to meet 2009 terminal tax payments. The main benefits from the provisions enabling transfer of money between intermediaries will be delayed until 2010.
As the amendments to the tax pooling provisions are not contentious, they should be split out from the bill and enacted separately.
Also, clause 406 of the bill provides for the transfer of pooling funds between tax pooling intermediaries, either at the taxpayers request or by mutual agreement between intermediaries. This clause comes into force on the date of assent of the Act. However, all the other clauses introducing changes to the tax pooling rules apply from 1 April 2009.
The bill should be amended to enable the transfer of tax pooling funds to apply from 1 April 2009. (Electronic Tax Exchange)
The application date should be backdated, but to the date the bill was introduced. This would allow taxpayers to benefit from reduced use-of-money interest. (New Zealand Institute of Chartered Accountants)
Comment
The original expectation was that the bill would be enacted before 1 April 2009, and therefore the provision enabling the transfer of pooling funds between intermediaries would apply from date of assent, being before 1 April 2009. With the delay in enacting the bill, the date of assent will now be after 1 April 2009.
There is no ability for the legislative provision which enables tax pooling funds to be transferred between intermediaries to be backdated to apply from 1 April 2008. To be effective, a transfer would need to occur under the existing legislation, which does not allow such transfers.
As a result of the delays in enacting the bill, officials recommend that the application date for the tax pooling provisions be the date of assent of the legislation.
The delays in enactment will reduce the time available for tax pooling intermediaries to attract new deposits for the 2009–10 tax year.
Recommendation
That the Committee agree to the tax pooling provision applying from the date of assent of the legislation as a result of the delays in enactment of the bill.
Issue: Transfer of pooling funds by an intermediary to another intermediary
Clauses 406 and 510
Submission
(Matter raised by officials)
Clause 406 allows a taxpayer to transfer funds from one tax pooling intermediary to another intermediary, while retaining the original effective date of the deposit. However, the provision does not provide for an intermediary to instigate the transfer of pooling funds between intermediaries. The transfer between intermediaries could apply when one of the intermediaries is beginning or ceasing business.
This provision would foster competition among intermediaries and enable intermediaries to transfer their business to another intermediary if they wanted to cease business.
The new provision should apply to all deposits held by an intermediary.
Also, where amounts are transferred between intermediaries, the amounts retain their original effective date, being the deposit date with the original intermediary. The effective date provision is currently contained in clause 510 of the bill. To make the pooling rules easier to understand, officials recommend that the effective date provision be included in clause 406 of the bill, which provides for transfers between intermediaries.
Recommendation
That the submission be accepted.
Issue: Ordering rule for the allocation of tax pooling funds
Clause 407
Submission
(35 – PricewaterhouseCoopers)
The bill provides that where an amount is transferred from a tax pooling account and credited to a taxpayer’s account after the terminal tax date, the amount is applied first to any interest outstanding and the remainder applied to the principal. This provision should be omitted.
Comment
Where a taxpayer applies, within 60 days of the terminal tax date, to use tax pooling funds to pay their terminal tax liability, the funds are credited to the taxpayers account as at the terminal tax date and applied to the principal amount. Where the taxpayer applies to use tax pooling funds to satisfy a terminal tax liability outside the 60-day period, the taxpayer has not complied with the tax legislation and the funds are transferred at the date of payment. The taxpayer will therefore be liable for interest from the due date to the date of payment.
When the penalties and interest legislation was introduced, consideration was given to how payments were to be applied to outstanding tax liabilities. The government of the day decided to apply payments to penalties and interest first, with any remainder applying to the principal tax amount. If payments were instead applied to the principal amount first, there would be an incentive not to pay the penalties and interest amounts, thereby reducing the cost to taxpayers of not complying with their obligations.
The ordering rules relating to tax payments from a tax pooling account reflect the ordering rules for other tax payments.
Recommendation
That the submission be declined.
Issue: Commissioner’s notification
Submission
(Matter raised by officials)
The current legislation requires the tax pooling intermediary to provide the Commissioner with details relating to deposits made with the intermediary. On receipt of this information, the Commissioner provides this information back to the intermediary. In practice, the Commissioner does not currently provide the details back to the intermediary. To do so would increase both compliance and administration costs, with no real gain.
Officials propose to amend section RP 18(4) of the Income Tax Act 2007 to require simply that the Commissioner confirms receipt of details provided by the pooling intermediary, rather than provide the details back to the intermediary.
Recommendation
That the submission be accepted
Issue: Transferring of funds between tax pooling intermediaries
Clause 510
Submission
(Matter raised by officials)
The ability to transfer money between tax pooling intermediaries is currently contained in two Acts. The ability to transfer funds between tax pooling intermediaries is in the Income Tax Act and the effective date of the transfer is contained in the Tax Administration Act.
Officials consider the provisions that apply to the transfer of funds between tax pooling intermediaries should be contained in one Act, the Income Tax Act and therefore recommend that clause 510 of the bill be amalgamated with clause 406.
Recommendation
That the submission be accepted
Issue: Interest paid on deposits in tax pooling accounts
Submission
(Matter raised by officials)
An amendment is proposed to section 120OE(1) of the Tax Administration Act 1994 to specify that interest is payable on deposits in a tax pooling intermediary’s account from the date of the deposit and ends on the date the amount is refunded or transferred. The current wording does not specify the end date for the calculation of the interest.
Recommendation
That the submission be accepted.