Determinations
(Clause 46)
Summary of proposed amendments
The bill proposes that the Commissioner of Inland Revenue has the power to issue Determinations with reference to AIM.
Application date
The proposed amendments will apply for the 2018–19 and later income years.
Key features
It is proposed to issue Determinations in two circumstances. A proposed amendment to section 91AAX of the Tax Administration Act 1994 provides that the Commissioner will issue a technical Determination that details the tax adjustments required for accounting income and expenditure under the AIM approach, and Inland Revenue’s information requirements regarding AIM.
In making these Determinations the Commissioner would take into account the accuracy resulting from these adjustments, the compliance costs incurred by taxpayers and the resources available to AIM providers. The Determination must also set out the tax years for which the Determination will apply, and the requirement for the Commissioner to give at least 120 days notice for implementation to AIM providers and publish the Determination within 30 days of making it.
Section 91AAY of the Tax Administration Act 1994 proposes that the Commissioner also has power to issue an exclusion Determination to exclude a class of taxpayers from using AIM in circumstances when an accurate assessment of tax liabilities could not be made.
Detailed analysis
Technical Determination
AIM is a tax collection method. While it is not a year-to-date method that requires exact tax liabilities calculated on a regular basis, it does need to ensure that reasonably accurate amounts of tax are collected during the year. For this reason, AIM will require a series of adjustments to calculate the amounts of provisional tax due. Software providers delivering AIM will build these adjustments into their systems. To ensure commonality across taxpayers and systems, it is proposed this Determination contains the agreed treatment for the core adjustments required to reach the desired level of accuracy within AIM. Adjustments not defined by the Determination will be designed by software providers themselves, with the requirement they always calculate tax liabilities using tax adjustments that result in reasonably accurate assessments of tax liabilities for taxpayers. These may include accruals or estimates for other matters that would typically be adjusted for in year-end review processes.
Proposed approach
The process of developing the Determination should be open and transparent. Therefore this Determination would be developed during 2016 by an Inland Revenue-led working group comprising interested public and private sector parties, including representatives from the software and accounting professions. This working group would identify the core tax adjustments that would be compulsory in the Determination and identify ways of accounting for these on an interim year basis. It would ensure that the core adjustments are kept to a minimum and their calculation is simple and practical for use, avoiding increasing compliance costs while working towards a goal of increased accuracy during the year. The adjustments are to work towards the calculation of reasonably accurate assessments of tax liabilities for the taxpayer. It would consider what current good accounting practice for these adjustments is and, where possible, keep close to this treatment.
This working group would report, on a regular basis, to a governance group of representatives from the business and accounting sectors. The group would provide oversight and a practical perspective on the design of AIM and its use in business.
It is proposed that this information be contained in a Determination rather than in this bill as it will be easier to update and account for future technology advancements, tax changes and allow further time for wider consultation and development. It is expected that there will be an early indication of what the core adjustments will be and the proposed Determination would be completed in time for AIM providers to use for the design of their systems in 2017. The Determination would not be complex in nature and would be designed for use by software providers to use when developing their software.
Consultation to date has outlined some adjustments that may be suitable for the Determination. Current thinking on possible treatment is outlined below.
Tax depreciation
It has been suggested that current software models would be enhanced to enable depreciation schedules to be calculated throughout the year in the taxpayers version of software (previously depreciation calculations were only included in tax agent version). A taxpayer could then claim depreciation to date. Most small businesses use Inland Revenue depreciation rates and as such no separate adjustment would be required.
Trading stock
Where a company has material movements in trading stock values, it is likely that it currently uses a perpetual inventory system to keep up to date figures for its accounting records, and these would suffice for AIM. Current thinking is that AIM would not require additional stocktakes for those using periodic inventory systems as they may be able to use their closing figure from the prior year.
Temporary timing differences
The intent of AIM is proposed to be on “reasonable accurateness” during the year. There will be, however, situations when timing differences are not captured by the accounting software system. Where this occurs, it has been suggested that Inland Revenue be tolerant where an amount is likely to balance out in the next period, and it may not need to be accrued. However, if it relates to longer than two provisional tax periods it may be accrued in the normal manner.
Provisions
Provisions have the ability to decrease accounting income during the year and then be reversed at year end, increasing the accounting income just prior to the tax return is filed. Current thinking is that while provisions are not overly common in the small business market, where they have been accounted for, they might be reversed out for AIM purposes.
Financial arrangements/foreign exchange
For taxpayers with an emphasis on exporting, foreign exchanges gains or losses and financial arrangements may be material for review for tax purposes. Good accounting practice and principles will be considered for these adjustments. Current Inland Revenue thinking is that keeping as close to accounting treatment and cashflow impacts as possible is important for taxpayers.
Shareholder salary accruals
These may be included in the Determination as an anti-avoidance measure. All shareholder salaries will be treated as non-deductible unless they have been paid out in the period the instalment relates to. Any overpaid provisional tax that relates to shareholder salary accruals can be transferred to the shareholder to meet their corresponding provisional tax liability.
User defined entry
There may be times when the accounting software does not give a fair reflection of likely taxable income. Initial thinking is that in this instance, a taxpayer may need to override the system and manually insert a new figure that will bring the system closer to a reasonably accurate figure. Current thinking is that these events will be identified on the Statement of Activity, and consultation will consider what circumstances these might occur in and what appropriate checks and balances will be needed.
In making these Determinations section 91AAX of the Tax Administration Act 1994 proposes the Commissioner must have regard to three areas: the accuracy resulting from these adjustments, the compliance costs incurred by taxpayers in making these adjustments and the resources available to the AIM software providers. It is important these factors are kept in balance to ensure a reduction in compliance costs for taxpayers. It is important that AIM itself is based on a “click, review, send” methodology. It is not intended to result in a series of mini tax returns throughout the year which would increase compliance costs for taxpayers.
Any tax adjustments the Commissioner considers necessary would be required to be built into software, which places costs upon the AIM software providers. When developing this, the Commissioner would consider the resources available to AIM providers to ensure that the drive for increased accuracy does push them past the point of financial viability.
Exclusion Determination
Proposed section 91AAY of the Tax Administration Act 1994 provides the Commissioner with power to issue a Determination to exclude a class of taxpayers from using AIM in circumstances when an accurate assessment of tax liabilities could not be made.
This would occur when analysis shows that using the AIM approach is resulting in systematically inaccurate results for the particular class of taxpayers due to their use of accounting software – that is, specific income and expenses that cannot be calculated correctly by general software and more bespoke software is required.