Issues raised by the Committee’s specialist tax adviser
Issue: Requirement to file a return
Submission
Taxpayers who are not exempt from filing a return or being issued a PTS and who are required by the law to be issued (or request) a PTS may not be aware of their obligations. For example, a person who earns more that $200 of interest or dividends who did not have resident withholding tax deducted at their correct marginal tax rate. Furthermore, this obligation to file applies even when the taxpayer used a higher withholding rate than their marginal tax rate.
If a taxpayer is required to be issued (or request) a PTS and does not fulfil this obligation, the taxpayer may be subject to a late filing penalty and prosecution for failing to provide information to the Commissioner when required to do by a tax rule.
Comment
In practice, Inland Revenue identifies, based on the information it holds, taxpayers who should be issued a PTS. The issue of PTSs by Inland Revenue includes taxpayers who are entitled to Working for Families tax credits, those issued special tax codes and those who earned more than $200 of employment income and used a flat withholding rate (such as the casual agricultural workers’ code or an incorrect secondary tax code). Inland Revenue was provided with some legislative flexibility in the Taxation (Consequential Rate Alignment and Remedial Matters) Act 2009 to manage the issue of PTSs. In particular, it provided the Department with discretion in selecting who should be issued a PTS.
Inland Revenue informs taxpayers of their tax return filing obligations (including the need to request a PTS) in a number of ways. Customer research and feedback shows that just providing the criteria directly to taxpayers in a written format, even on the website, is not effective in supporting compliance. As a result, the “required to file” criteria has been incorporated into two online calculation tools:
- one for taxpayers to determine if they are required to file an IR 3 or request a PTS; and
- the online “Personal Tax Summary” Calculator tool (most popular online tool for end-of-year tax).
These tools are available for the current 2012 tax year and previous years. In mid-2012 Inland Revenue will be launching these services within its secure online services system as this increasingly becomes taxpayers’ first point of contact.
Each year Inland Revenue undertakes an advertising campaign to make sure taxpayers are aware of their end-of-year tax obligations and entitlements as well as services available to support those obligations. In 2012 this campaign includes television, online, radio and magazine advertising as well as a text messaging campaign to selected groups. This campaign directs taxpayers to Inland Revenue’s online campaign pages at www-ird.govt.nz/tax2012 [site no longer available - see Internet Archive for archived version]. From this page taxpayers can directly access both the “required to file” and “Personal Tax Summary” calculators for the current year, and links to previous years.
As part of the communication strategy mentioned above, Inland Revenue has an agreement with payers of RWT and NRWT to incorporate key messages to taxpayers on their annual statements or certificates that the taxpayer may be required to file a return and to refer to our website. We also issue communications to key external parties such as tax agents to advise changes to any products or processes. Tax agents can also access the information and services online.
In developing the rules to determine which taxpayers are obliged to file returns or be issued with PTSs, it is important to take into account perceptions of fairness. The current rules are neutral as to whether a person has had tax over- or under-withheld at source. Instead, they focus on the correctness of the rates. If the rules only focussed on placing filing requirements on taxpayers to be issued with PTSs if they were under withheld at source, there could be concern that the filing requirements were biased towards the revenue, despite the fact that a person could choose to file if they were over-withheld. The impact of this would be more pronounced with the implementation of the four-year square-up rule. Officials consider that the current rules strike the appropriate balance.
Under current law, a person to whom section 33A of the Tax Administration Act 1994 applies (and this includes persons who are required to request a PTS) is not liable for the late filing penalty if they do not file or do not file on time. This exclusion will continue to apply given the distinction between IR 3 and PTS filers will continue if, as officials have recommended, the amalgamation of the tax forms does not proceed.
While a taxpayer who is required to request a PTS could be prosecuted for not filing a PTS, it is very unlikely. Prosecution action is usually a last resort to ensure that taxpayers comply with their obligations. Furthermore, prosecuting a person who is due a refund is unlikely to promote voluntary compliance by taxpayers in the broader context. The Commissioner is responsible under sections 6 and 6A of the Tax Administration Act 1994 for protecting the integrity of the tax system and the care and management of the Inland Revenue Acts – including promoting voluntary compliance. Prosecuting such cases would generally not be consistent with this statutory responsibility. Officials are not aware of any person being prosecuted for not requesting a PTS.
Recommendation
That the submission be noted.
Issue: Tax records being available to meet filing obligations
Submission
A taxpayer who is subject to the four-year square-up rule may not hold or have access to sufficient income and tax records to meet their filing obligations. A consequence of not being able to file a correct return could be prosecution for knowingly filing an incorrect return. This could lead to prosecution and the imposition of a fine by the courts.
Comment
As noted in the Committee’s specialist tax adviser’s report, a person to whom section 33A applies is only required to retain tax records relating to income that has been deducted at source for 12 months after the expiry of the tax year to which they relate. Officials do not consider it is appropriate to extend the record-keeping requirements for such taxpayers to deal with the four-year square-up.
Inland Revenue receives salary or wage information from employers and interest and dividend information from payers of resident withholding income. All this information is input into Inland Revenue’s computer system. Any salary or wage income and tax withheld details are pre-populated in a PTS issued (or requested). Inland Revenue’s systems cannot currently pre-populate interest and dividend information held. Furthermore, as only one IRD number is provided to payers of interest and dividends the allocation of income from joint bank accounts is problematic. If a taxpayer requests details of their resident withholding income, Inland Revenue has the ability to access and provide this information.
In addition, a taxpayer can access the resident withholding income information from the payer of the income. From discussions with one bank, they would charge a small service fee for providing this information. This expenditure would be deductible for tax purposes as a cost in determining their tax liability.
Furthermore, the current provisions relating to PTSs allow a person to ignore including in the return gross income from employment, interest or dividends if that amount is $200 or less. This provision will continue to apply if the amalgamation of returns proposal does not proceed.
For the reasons noted above, it is very unlikely that the Department would prosecute a person who is required to file a PTS for filing an incorrect return.
Recommendation
That the submission be noted.
Issue: Circumvention of the four-year square-up rule
Submission
It is easy for a person to circumvent the four-year square-up rule by ensuring that for a particular year that they think they are entitled to a refund they ensure that they are required to file a PTS. For example, using an incorrect RWT rate if the person receives interest over $200.
Comment
Officials acknowledge this risk but consider that the risk is quite low. Of those taxpayers who requested a PTS for the 2009–10 tax year, approximately 7 percent of them returned interest and dividends. Officials intend to monitor this risk.
Recommendation
That the submission be noted.