Use-of-money interest and transfers of tax

(Clauses 106, 119 and 120)

Summary of proposed amendment

Amendments are being made to the Tax Administration Act 1994 to prevent taxpayers from transferring tax to an earlier period that exceeds the amount in debt or in dispute in that period, and to clarify when use-of-money interest (UOMI) starts and when a transfer takes effect for GST refunds and GST overpayments.

Application date

The amendments will come into force on the date of enactment.

Key features

The proposed amendments to sections 173L and 173M will limit transfers of excess tax within the taxpayer’s accounts or to another taxpayer to the total of the amount in debt and/or in dispute in the requested period. This limit will only apply to transfers to earlier periods, not to future periods. Amendments to section 173L also clarify the effective transfer date of GST refunds and overpayments.

Changes to section 120C distinguish the rules that determine when UOMI starts for GST overpayments from the rules that determine when UOMI starts for GST refunds. This will ensure that the date UOMI begins for overpaid GST is consistent with when UOMI begins for other tax types that have been overpaid.

Background

Taxpayers are able to transfer tax credits to tax periods, tax types or other taxpayers.

Currently, taxpayers are able to transfer amounts that exceed the amounts owing in previous periods. When this happens they are paid UOMI from an earlier date than if they had not moved the money.

The Tax Administration Act does not distinguish between a GST refund, which occurs when GST inputs/expenses exceed GST outputs/sales, and a GST overpayment, which occurs when a taxpayer overpays their GST liability. As both scenarios result in a refund, it can be argued that a GST overpayment constitutes a refund, and is therefore eligible for the transfer date applicable to GST refunds, which is earlier than the transfer date applicable to overpayments. The date of transfer affects when UOMI on a previous overpayment stops being charged. Therefore a taxpayer transferring an overpayment of GST to settle a debt in a previous period will pay less UOMI to Inland Revenue than was intended because the payment will be transferred at the earlier refund date.

The policy intent behind the proposed amendments is to ensure taxpayers are paid the correct amount of UOMI on overpayments or refunds of tax, and that taxpayers pay the correct amount of UOMI to Inland Revenue on underpayments of tax.