Simplifying filing requirements for individuals
Overview
The bill contains a number of amendments which deal with income tax and Working for Families tax credit return-filing requirements for individuals. The purpose of the changes is to reduce the use of paper forms in administering the tax system, instead moving towards greater use of online services and technology. The effect should be an overall reduction in compliance costs for taxpayers and greater operational efficiencies for Inland Revenue.
Under the current rules, income filing obligations for individuals fall into two broad groups. The first group is those taxpayers who are required to file income tax returns. It includes those who earn income that is not taxed at source, such as business income and investment rental income, those who receive income that has been taxed at source such as salary or wages but at an incorrect withholding rate, and those that are entitled to Working for Families tax credits. The second group is those taxpayers who are not required to file a tax return but may choose to do so. It includes those who have earned income subject to tax at source such as salary or wages that has been withheld at the correct rate.
Depending on the nature of the income earned, a person files either an IR 3 income tax return or is issued an income statement (also known as a personal tax summary (PTS)). Inland Revenue either issues a PTS or the taxpayer requests one. Taxpayers whose income comprises mainly salary or wages and resident withholding income (such as interest and dividends) may receive a PTS.
The bill provides for:
- The removal of the requirement for the Commissioner to issue PTSs to certain taxpayers. These taxpayers will now be required to file tax returns. This proposal will remove the distinction between the two major income tax forms for individuals and effectively result in their amalgamation.
- The requirement for taxpayers who are not required to file tax returns, but who choose to do so anyway, to file for the previous four years, in addition to the year in which they have chosen to file. This is to prevent taxpayers filing only in the years that they are due refunds (known as “cherry picking”).
- The de-coupling of the requirement for a taxpayer to file an income tax return or receive a PTS merely because they receive Working for Families tax credits.
These proposals will apply for the 2014–15 and later tax years.
Implementation of these proposals will be supported by an Inland Revenue-driven strategy aimed at moving taxpayers to electronic services.
As noted in the Minister of Revenue’s letter of 20 March 2012 to the Committee, Inland Revenue officials have been reconsidering whether these proposals could be implemented in a manner that is less resource- and system-reliant. Inland Revenue’s systems are currently under significant pressure and the resourcing of systems changes is constrained. Not proceeding with the “amalgamation” of the individual tax forms proposal will allow a less resource- and system-reliant solution to be implemented while still achieving the policy outcomes being sought.
In addition, given that Inland Revenue has a number of significant policy initiatives to implement in the coming years, such as the student loan redesign, child support changes and developing its Business Transformation blueprint and future operating model, deferring the implementation date of the other return filing proposals would provide some flexibility for the Department. This will enable the implementation of these proposals to be integrated with Inland Revenue’s Business Transformation programme and new operating model.
Issue: Amalgamating the income tax forms
Submission
(Matter raised by officials)
The proposal to amalgamate the two main income tax forms for individuals (the IR 3 and the PTS forms) should be removed from the bill.
Comment
As previously indicated, Inland Revenue officials have been reconsidering how this suite of proposals contained in the bill could be implemented in a way that is less resource- and system-reliant. Not proceeding with the income tax form amalgamation proposal would allow a less resource- and system-reliant solution to be implemented. The amalgamation proposal would have given rise to administrative benefits and savings which are separately being realised as part of the implementation of Inland Revenue’s e-service strategy. Removing the amalgamation proposal from the bill would not have any impact on the fiscal savings from this suite of proposals.
The result will be that the two paper forms, the IR 3 and the PTS, will continue to be used according to current practice. However, in the e-services environment, the distinction will become less apparent as the environment being created will be a more taxpayer-centered return.
The practical effect of this submission is that provisions relating to the issue and administration of PTSs will continue to apply. The amendments in the bill proposing to repeal these provisions in the Tax Administration Act 1994 and the Income Tax Act 2007 will therefore be removed.
Recommendation
That the submission be accepted.
Submission
(KPMG)
The current system of different tax return forms creates confusion among taxpayers over which form they must file, and a rationalisation of these forms is a welcome change. However, it is important that the replacement form is clear, simple to complete and requires minimal compliance costs. The forms should include as much pre-populated information as possible. Although supportive of the return being web-based, there should be accommodation for those taxpayers unable to or uncomfortable with filing online, and assistance and education should be offered.
Comment
Officials agree with the tenor of the submission.
However, given that officials are recommending not to proceed with the proposal to amalgamate the income tax forms for individuals, there will continue to be different tax forms for individuals. While the intention is to move individuals to online filing, a paper alternative will continue to be available.
Recommendation
That the submission be noted.
Issue: There should be a consistent filing requirement for all recipients of Working for Families tax credits
Submission
(KPMG)
Since some Working for Families tax credit recipients will still be required to file income tax returns, it would be simpler to have a consistent filing requirement for all recipients of the credits. There is concern that a new process will add to the information filing requirements of this group, when instead the process should be further simplified. The Committee should therefore test with officials the rationale for a new information collection process for family assistance recipients, rather than a simplification of an existing or proposed return process.
Comment
The basis of the proposal in the bill is that the need for a person to determine their annual income tax liability is not required to assess a taxpayer’s entitlement to Working for Families tax credits. What is actually needed to assess entitlement is their income information, not their annual income tax liability. This has become more relevant since the definition of “income” for Working for Families was broadened to include information that is not typically included in an income tax return.
The proposal to remove the income tax filing requirement will not add additional filing requirements for any taxpayers, and will reduce the compliance cost of this activity for approximately 75 percent of Working for Families recipients. The remaining recipients will be required to file for reasons other than their entitlement to the tax credits. All recipients will still be required to undertake a year-end “square-up” of the tax credits and income they have actually received, as per the current process. This is necessary to ensure that people received their correct entitlement.
Officials do not consider that a general income tax filing requirement is necessary for these taxpayers. In addition, the proposal as it currently stands should significantly decrease the compliance costs placed upon this group. Those Working for Families recipients who are not required to file a return can still choose to file one.
Recommendation
That the submission be declined.
Issue: Reducing compliance costs and making use of smart technology
Submission
(New Zealand Institute of Chartered Accountants)
The proposed changes in the bill fail to deliver any material compliance cost savings to businesses. The initiative to develop and make better use of smart technology as outlined in the discussion document and online forum Making tax easier is progressing at glacial pace. Reform is needed with respect to the way in which small businesses calculate and pay their income tax and calculate and account for PAYE, such as making certain types of source-deducted income (income subject to RWT, scheduler payments and royalties for example) subject to a final tax. People who receive income that is subject to source deductions and who also receive social assistance should have their tax liability decided by source deductions.
Comment
The changes in the bill that relate to PAYE are, for the main part, aimed at reducing compliance costs for individuals.
Options to progress Inland Revenue’s use of electronic technologies as the main form of service delivery were outlined in Making tax easier. Many of the submissions noted concern at mandating electronic services, arguing that this form of service delivery may not be suitable for some taxpayers who are uncomfortable about using computers and technology, and who may not have access to the necessary tools in order to comply. The proposals in the bill therefore aim to strike a balance between these concerns, and the need for Inland Revenue to deliver better and smarter services, with greater use of smart technology.
In considering the submission on making certain source-deducted income subject to a final tax, officials note that a variant of this was outlined in Making tax easier. The proposal in the discussion document was that taxpayers in steady employment for 11 or more months of the year who derive the bulk of their income from salary and wages should have their PAYE deductions treated as “full and final” and so should be unable to file an income tax return. The submissions received on this point were, for the most part, in strong disagreement with it. Submitters argued that taxpayers have a right to seek any over-deductions of income, particularly given the potential for this. However, as PAYE withholding becomes more accurate, there may be a case for revisiting this proposal.
Recommendation
That the submission be noted.
Issue: Unique identifying numbers for individuals
Submission
(New Zealand Institute of Chartered Accountants)
All taxpayers should have a single unique identifying number for dealing with government.
Comment
The Government recently announced as part of its Better Public Services programme two result areas that relate to improving interaction with government. These result areas are:
- New Zealand businesses have a one-stop online shop for all government advice and support they need to run and grow their business; and
- New Zealanders can complete their transactions with the Government easily in a digital environment.
A single business identifier is likely to be considered as part of this work.
Recommendation
That the submission be noted.