Modernising tax administration – Individuals’ income tax

• Overview
• Proactive actions
• Tailored (special) tax codes
• The year-end income tax obligations of individuals
• Refunds of tax and amounts of tax to pay
• Repeal of income statement rules and other consequential amendments
• The administration of donation tax credits

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OVERVIEW

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Background

The proposed changes to the administration of individuals’ income tax aim to simplify individuals’ year-end income tax filing obligations and ensure that more appropriate withholding rates are applied to income during the year.

The key proposals in the Bill aim to:

• enable Inland Revenue to proactively help individuals to use the most appropriate tax rates or codes;
• enable the use of tailored tax codes to improve the way that secondary sources of income and irregular patterns of income earning are taxed;
• simplify the year-end income tax obligations of individuals;
• enable the automation of refunds of tax and amounts of tax to pay; and
• improve the administration of donation tax credits.

Application date

The proposed changes are expected to come into force on 1 April 2019 and the proposed end of year processes will be applied for the tax year ended 31 March 2019.

Summary of proposed amendments

The general legislative provisions set out in the following five commentary items prescribe the way in which individuals will interact with Inland Revenue in relation to the income tax system. By receiving regular income information throughout the year,[1] Inland Revenue will be able to ensure individuals are on the appropriate tax code or rate, and about the right amount of tax is withheld throughout the year. Unnecessary compliance costs will be removed from individuals, and income tax filing obligations will be simplified so that they are easily understood.

Current filing mechanisms, such as personal tax summaries and IR3 forms, will be replaced by a pre-populated account that includes all income information that Inland Revenue holds about the individual. People who only earn “reportable income” will not have to do anything unless they know that the reportable income information is incomplete. Only those people who earn income or have deductions that Inland Revenue does not already know about, will have to provide further information to Inland Revenue.

Under the proposals, individuals will fall into one of three groupings and may move between groups over time as their income profile changes. The groupings are:

• Group A (automated process) – the individual earns “reportable income” and Inland Revenue judges that the income information it holds for the person is correct. In these cases, the refund or tax to pay will automatically be calculated, assessed and actioned accordingly (that is, refund or tax bill issued).
• Group B – the individual earns reportable income, but Inland Revenue considers based on previous returns and other information that the individual may have other income or deductions. In these circumstances, the individual will be requested to provide the additional information or confirm that income information held is correct.
• Group C – the individual has no or very little reportable income. Individuals that fall into this category will then be required to provide income information – similar to the current IR3 process where a return of income is required.

Group B and Group C can be considered subsets of each other depending on the amount of income information Inland Revenue holds or requires.

Reporting of income information by individuals (new subpart 3B)

New subpart 3B provides the administrative settings that underpin an individual’s obligations under sections BB 2, and BC 1 to BC 6 of the Income Tax Act 2007 to calculate and satisfy their income tax liability for a tax year.

This background section explains the key terms that will apply for these new rules and the information to be included in the pre-populated account. The remaining sections that make up this subpart will be canvassed in detail under the subheadings “year-end income tax obligations of individuals” and “refunds of tax and amounts of tax to pay”.

Key terms (proposed new section 22D)

The key terms for these new rules are:

• Meaning of individual – Section 22D(1) provides that, for the purposes of this subpart, and for a number of other specified sections in the Tax Administration Act 1994 that pertain to a taxpayer’s obligations, an individual means a living natural person. A natural person is deemed to include a person who is non-resident, but not a person whose only income for the corresponding income year is non-resident’s foreign-sourced income.

In the situation where a natural person dies, they will be treated as an individual and will be subject to the individual’s tax rules up to and including the date of their death. Following death, their estate will be treated as a trust until it has been distributed.

• Meaning of reportable income – Reportable income covers sources of income that Inland Revenue receives information on by way of third party reporting during the year, or shortly after the end of the year. For the purposes of subpart 3B and section 33, this includes all PAYE income payments and resident and non-resident passive income.
• Meaning of other income – Proposed new section 22D(3) provides that other income is income paid or payable to the individual for the corresponding income year that is not reportable income for the tax year. For the purposes of this subpart and section 33, the term “other income” is intended to cover all income that an individual earns that is not “reportable income”.
• Meaning of pre-populated account – As per proposed new section 22D(4), a pre-populated account will contain details of the individual’s income for that tax year that are known to the Commissioner and this will be made available to the individual. It can include both “reportable income” and “other income”.
• Meaning of adjusted account – An adjusted account, defined in proposed section 22D(5), is a pre-populated account that contains information the individual has provided on any other income they derived for the corresponding income year and any deductions or tax credits (see proposed schedule 8 table 2). The Commissioner can also amend information in the individual’s adjusted account to correct errors in the information and must inform the individual of the amendment (section 22H(2)).
• Meaning of final account – The final account is the set of information that in some way (whether through confirmation, the Commissioner being satisfied, or the passage of time) becomes the final set of information that the tax assessment is based on. Where the Commissioner is not satisfied that the information in an individual’s account is complete, the Commissioner may issue a default assessment. Specifically, proposed section 22D(6) provides that a final account for an individual and tax year means:
  • a pre-populated account if the individual has confirmed it as correct and complete (section 22G(1)) or the Commissioner has notified the individual that the Commissioner is satisfied to that effect (section 22I(2)(b);
  • a zero pre-populated account referred to in section 22E(3), if, through the passage of time, the account is treated as an assessment under section 22I(2)(c);[2] or
  • an adjusted account if the individual has confirmed it as correct and complete (section 22G(2)) or the Commissioner has notified the individual that the Commissioner is satisfied to that effect (section 22I(2)(b)) or where, through the passage of time, the account is treated as an assessment under section 22I(2)(c).

Information included in pre-populated accounts (proposed new section 22E)

Under proposed section 22E(1), Inland Revenue must include in an individual’s pre-populated account all information it holds for the tax year relating to any reportable or other income that it considers the individual has derived for that year. As per proposed section 22E(2), section 22E(1) only applies where the information is available or relevant for the individual in making an assessment for the tax year.

If Inland Revenue has no information for a tax year on an individual’s reportable or other income, the individual is treated as having a zero pre-populated account (proposed section 22E(3)). The zero pre-populated account gives a basis for any future adjustments that may arise.

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PROACTIVE ACTIONS

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(Clauses 28 and 30)

Summary of proposed amendment

Several amendments are proposed to enable Inland Revenue to proactively help people use appropriate tax rates or codes during the year to minimise year end debts and refunds. The proposed changes are:

• Inland Revenue would monitor changes in a person’s earnings and identify where they may be using an incorrect or unsuitable tax code or tax rate.
• Inland Revenue would contact individuals who use an unsuitable tax rate and recommend they change it.
• Where Inland Revenue has contacted an individual regarding their use of an unsuitable tax rate for their investment income and the individual does not object within 20 working days, Inland Revenue will instruct the investment income payer to update the rate.

Application date

The proposed amendments will come into force on 1 April 2019.

Key features

Inland Revenue will use more frequently provided employment and investment income to determine whether people are using the most appropriate tax rates during the year. Where people are using tax rates that seem to be too high or too low, Inland Revenue will contact them and advise that another rate may be more suitable.[3] Inland Revenue will suggest the rate but will not require the individual to use the proposed rate as the individual has the best understanding of their likely income for the rest of the year and may therefore be happy to stay on their current rate. The exception to this is for investment income where Inland Revenue will instruct the payer to use the proposed withholding rate if the individual has not objected within twenty working days.

Background

Currently, if an individual is using a tax code which they are not entitled to use, Inland Revenue will contact their employer and instruct that the code be changed. If an individual is using a code that is not wrong per se, but does not reflect their likely year-end tax liability, Inland Revenue does not suggest corrective action. This means that individuals need to square up at the end of the year, resulting in a debt or refund.

The recently enacted Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 will require employers to provide employment information to Inland Revenue on a payday basis and will require investment income payers to provide investment income information to Inland Revenue on a monthly basis.

By having access to this more timely information, Inland Revenue will be able to suggest corrective action when projections show that an individual is likely to end up with an under or over payment because of the withholding rate they are using.

In order to understand what the proposed amendments are trying to achieve, it is important to appreciate the distinction between an “incorrect” tax code and an “unsuitable” tax code. Unsuitable tax codes are the focus of the proposed amendments relating to proactive actions. An individual’s tax code will be deemed incorrect where they are using a code that they are not entitled to use (for example, if an individual has a student loan but is on an “M” tax code, not “M SL”). The current position under the law will remain unchanged for incorrect tax codes and Inland Revenue will continue to contact the individual’s employer and instruct that the code be changed.

An “unsuitable” tax rate or code is used in the proposed amendments to describe situations where an individual is using a code they are eligible to use, but where projections suggest that the individual is likely to end up with an under or overpayment of tax.

Detailed analysis

All references are to the Tax Administration Act 1994 unless otherwise stated.

Use of unsuitable tax codes (proposed new section 24DB)

Under the proposed amendment, if an individual who receives PAYE income is on an unsuitable tax code, Inland Revenue may recommend a change to the tax code, and with consent of the individual, notify the employer of this change.

The policy intent behind this section is to assist individuals who are not on a wrong rate per se, but would benefit from changing to a different tax rate sooner. Changing to a different rate will better approximate the individual’s ultimate tax liability, and therefore reduce the size of a debt or refund position the individual would otherwise be in by year end.

Although Inland Revenue may recommend that an individual changes their tax code, Inland Revenue will not notify the employer to make a change unless the individual accepts it. This is because an individual is better placed than Inland Revenue to know about their upcoming employment plans, such as time off work or variable hours. It therefore follows that, while Inland Revenue may recommend a change in code for an individual, it is more appropriate for the ultimate decision to lie with the individual.

Use of unsuitable RWT rates (proposed new section 25A)

Inland Revenue may contact an individual regarding their use of an unsuitable tax rate for their investment income. If the individual accepts the suggested rate or no response is received within 20 working days, Inland Revenue will instruct the investment income payer to update the rate.

It is noted that there is a difference between the treatment of an unsuitable PAYE code and an unsuitable RWT (resident withholding tax) rate. If an individual is on an unsuitable PAYE code, Inland Revenue will recommend a more suitable code, but will not instruct the employer to update the code unless the individual accepts it. For investment income, Inland Revenue will recommend a more suitable rate to the individual, but if no response is received within 20 working days, Inland Revenue will instruct the investment income payer to update the rate. The rationale behind a 20 working day rule for unsuitable RWT rates is that the amount of money involved is usually much smaller than with PAYE and therefore there is less risk of the proposed change leading to unsuitable amounts of withholding.

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TAILORED (SPECIAL) TAX CODES

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(Clauses 27 and 28)

Summary of proposed amendment

Several amendments are proposed to enable Inland Revenue to help individuals use tailored tax codes to ensure that the rate of withholding tax on their income, including secondary sources of income, is appropriate during the year. The proposed changes are:

• Inland Revenue would monitor changes in a person’s earnings and identify where a person may benefit from using a tailored tax code.
• The process for applying for a tailored tax code would be simplified (including being able to apply online).
• Inland Revenue would proactively contact individuals who may benefit from using a tailored tax code and recommend that they change their tax code.

Application date

The proposed amendments will come into force on 1 April 2019.

Key features

Inland Revenue will modernise the tailored tax code process by:

• introducing an online application process;
• notifying an individual’s employer of their updated tax code; and
• proactively recommending tailored tax codes to individuals in relevant circumstances.

This will improve the way that secondary sources of income, particularly employment income, are taxed by helping people to use an appropriate tax code so that about the right amount of tax is deducted during the year. The proposed legislative changes enable this by allowing Inland Revenue to contact individuals to suggest a tailored tax code and, in certain circumstances, contact the individual’s employer to advise them of this change.

Background

Under the current law, an individual with multiple jobs, or working while receiving a benefit from the Ministry of Social Development, should use either a secondary tax code or a special tax code. Secondary tax codes are intended to ensure that income from another job is taxed at the appropriate marginal rate.

Example 3 demonstrates that secondary tax codes will work as intended when an income tax threshold has not been crossed. However, as we have a progressive personal tax scale, secondary tax codes can result in more tax being withheld during the year than is necessary to satisfy the individual’s tax liability. This occurs when income from a second job takes a person’s total income over a tax threshold.

Example 4 results in an overpayment of tax because, by taxing at a person’s marginal tax rate, secondary tax codes prevent multiple claims of the lowest (or lower) tax rates for people with concurrent sources of PAYE income, which would result in tax owing at the end of the tax year.

In order to limit instances of incorrect withholding, individuals that work multiple jobs who are able to estimate their likely annual income could opt for a special tax code. This would give them a withholding rate tailored to their personal circumstances.

The disadvantages of the current rules on special tax codes are that an individual:

• needs to know about special tax codes;
• needs to realise that using one would benefit them; and
• needs to be able to estimate their likely annual income.

The process for obtaining a special tax code is also administratively burdensome. The individual must fill out an application and post it to Inland Revenue. Inland Revenue will then calculate the appropriate withholding rate and grant the individual a special tax code and a certificate that is only valid until the end of the tax year. The individual then has to advise their employer that they want the special tax code applied to their income. As a consequence, only about 8,000 individuals used a special tax code for the 2016 year (compared to about 570,000 secondary tax codes that were used).

The proposed amendments aim to modernise special tax codes (to be replaced by “tailored tax codes”) and make them more accessible. This will largely be achieved by introducing an online application process, Inland Revenue proactively recommending tailored tax codes to individuals in relevant circumstances and informing their employers of the change.

Tax codes provided by the Commissioner (amended section 24D)

The section has been amended to allow the Commissioner to recommend a tailored tax code to an employee. This gives effect to the policy intent by helping people with uneven earnings throughout the year and/or secondary forms of income to use an appropriate tax code during the year, thereby minimising the extent of incorrect withholding.

Consequential amendments have also been made to this section to indicate the terminology change from a “special tax code” to a “tailored tax code”. A “special tax code” under the old law, and a “tailored tax code” under the new law, both serve the same function of ensuring that a tax payer is on the most appropriate tax code during the year to minimise the extent of incorrect withholding.

Use of unsuitable tax codes (proposed new section 24DB)

This proposed amendment has been discussed under the “proactive actions” commentary item above but the section is also intended to apply to tailored tax codes. This section provides that if an individual who receives PAYE income is on an unsuitable tax code, Inland Revenue may recommend a change to the code, and with consent of the individual, notify the employer of this change.

This section has been drafted broadly and allows the Commissioner to recommend a “more suitable or more accurate tax code”. If the more “suitable or accurate tax code” in any particular instance is a tailored tax code, then it is intended that the Commissioner may recommend a tailored tax code under this section.

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THE YEAR-END INCOME TAX OBLIGATIONS OF INDIVIDUALS

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(Clauses 5(3), (21), (25), (26), (37), (43), (49), (60–62), 21, 69, 70 and 102)

Summary of proposed amendment

A number of amendments are proposed to set out the end of year income tax obligations of individuals and some of the processes that will be undertaken by Inland Revenue. The proposed changes are:

• Inland Revenue will make a pre-populated account available to each individual containing the income information that Inland Revenue holds for the individual.
• Where an individual confirms or Inland Revenue is reasonably satisfied that the information in the pre-populated account is all of the relevant information Inland Revenue would calculate the refund or tax to pay without the individual needing to provide any additional information. (Group A).
• Individuals will be required to provide any income information other than reportable income to Inland Revenue subject to some de minimis rules. (Groups B and C).
• Individuals will be able to provide other relevant information such as deductible expenses and tax credit information to Inland Revenue.
• Individuals will be required to provide or correct reportable income where they know or have reason to know that the reportable income information provided to Inland Revenue is incorrect.
• An individual’s tax assessment will occur when they have confirmed the tax information is complete, when Inland Revenue is reasonably satisfied that the information is complete, or when Inland Revenue is not satisfied that the information is complete and issues a default assessment.
• Individuals and Inland Revenue will be able to make corrections to the information held where they become aware that it is incorrect or incomplete and there will be error correction processes for adjustments made before and after an assessment has occurred.
• The end of year income tax process will replace the current personal tax summary and will replace the IR3 tax return processes over time as the paper IR3 is phased out.

Application date

The proposed amendments will come into force on 1 April 2019 and will apply for the tax year-end processes for the tax year ended 31 March 2019.

Key features

The end of year income tax process changes will mean that Inland Revenue provides as much information about an individual’s income[4] and tax credits as it can to form a basis for the calculation of the individual’s tax position (refund or tax to pay). Where Inland Revenue is reasonably satisfied that this is all of the relevant information for an individual this information will be treated as forming the individual’s self-assessment and their tax position will be calculated.

Individuals will be required to provide information on their other income (income other than their reportable income) and will be able to provide information on deductions and tax credits. This additional information will be added to the individual’s pre-populated account (now their adjusted account) and will become the individual’s self-assessment.

New error correction provisions will allow individuals and Inland Revenue to adjust the information where they become aware that it is incorrect. This can be done before an assessment has occurred and Inland Revenue can also make changes after the assessment subject to the time-bar rules. Changes can also be requested by an individual after the assessment under section 113 of the Tax Administration Act 1994.

Background

The current year-end processes involve Inland Revenue determining whether people who earn PAYE income should be issued with a personal tax summary (PTS) containing their PAYE income information or not. If people are not sent a PTS by Inland Revenue they can request one. If they do not get a PTS or do not file a tax return their tax position will not be squared up and any refund available will not be paid out. If they are issued with a PTS and their refund is less than $600 then it will be treated as confirmed after two months and the refund will be paid out. If the refund is greater than $600 then it will not be paid out unless they confirm their tax position with Inland Revenue.

The PTS only includes wage and salary information so individuals need to add in income from other sources such as interest income or dividend income. They may need to gather this information from several payers and these payers may also be providing this information to Inland Revenue directly.

Individuals are likely to have to file an IR3 tax return to provide this information if they have other types of income such as business income or foreign sourced income, or they wish to claim deductions or tax credits.

A large number of individuals have chosen to interact with Inland Revenue through PTS Intermediaries mainly because of a lack of awareness of how to directly claim any available refund directly from Inland Revenue. These businesses assist taxpayers with refund claims and typically charge a percentage of the refund or a fixed fee for the service they offer. If people did not use a PTS intermediary but instead applied directly to Inland Revenue, they would receive the full amount of their refund.

Individuals can also work out whether they are due a refund or whether they would have tax to pay before they request a PTS by requesting a summary of earnings. Generally, they are not required to request the PTS if they are in a tax-to-pay position and as such are able to cherry pick refunds.

Detailed analysis

All references are to the Tax Administration Act 1994 unless otherwise stated.

Inland Revenue to provide pre-populated accounts (proposed sections 22D(4) and 22E contained in new subpart 3B)

Proposed new section 22D(4) defines a pre-populated account as an account provided by Inland Revenue to an individual for a tax year containing the information held by Inland Revenue on the reportable or other income derived by the individual. Proposed new section 22E requires Inland Revenue to include all of the information that Inland Revenue holds on reportable or other income derived by the individual for the tax year in the individual’s pre-populated account for the tax year. This requirement is limited to where the information is available and is relevant to the individual for the tax year.

Section 22E(3) provides that where Inland Revenue holds no income information for an individual they will have a zero pre-populated account for the year. This is intended to provide a basis for adjustments should the individual or Inland Revenue become aware of further relevant information.

When a pre-populated account becomes a self-assessment (proposed sections 22D(6), 22G(1) and 22I contained in new subpart 3B) (Group A individuals)

Where Inland Revenue is satisfied that the information contained in the pre-populated statement is complete and correct, it will become a final account under proposed section 22D(6)(a)(ii) and therefore an assessment under proposed section 22I(1) when Inland Revenue notifies the individual (proposed section 22I(2)(b)). These individuals will not have to interact with Inland Revenue in any way for this to occur.

Proposed new section 22G(1) allows an individual who only has reportable income for a tax year to confirm that their pre-populated account is full and complete at any time during the assessment period. It will become a final account under proposed section 22D(6)(a)(i) and therefore an assessment under proposed section 22I(1). Proposed section 22I(3) provides that the assessment period begins on 1 April immediately following the tax year and ends on 7 July of the year following the tax year or at a later date in the next tax year if the individual has an extension of time to file a return.

Proposed section 22I(2) deems the assessment to arise when the individual confirms the pre-populated account is correct and complete. This allows an individual to make the confirmation sooner than Inland Revenue might or in circumstances where Inland Revenue has not initially been able to satisfy itself that the information in the pre-populated account is complete and correct.

The assessment will determine whether an individual has a refund due or has to pay tax. The treatment of refunds or amounts of tax to pay is explained in the next commentary item (Refunds of tax and amounts of tax to pay).

Obligations to provide other income information: (proposed sections 22D(3) and (5), 22F, 22J, 22K and 22L contained in new subpart 3B and proposed schedule 8 table 1) (Group B and C individuals)

Proposed new section 22F requires individuals to provide other income information to Inland Revenue (for all income that is not reportable income) subject to some de minimis rules discussed below. Proposed section 22D(3) defines other income as the income paid or payable to an individual for an income year that is not reportable income.

Proposed new section 22K(1) specifies that a list of other income items is set out in proposed schedule 8 table 1. This table identifies these items as being included in other income:

• New Zealand estate or trust income;
• overseas income;
• partnership income;
• look-through company income;
• rental income;
• self-employment income;
• employee share scheme income; and
• other income, including income from a disposal of property that is not otherwise included in reportable income.

Proposed new section 22J sets out the circumstances in which an individual will not have to provide other income information to Inland Revenue. Section 22J(1) provides that an individual will not have to provide information for a tax year if the individual derives other income of less than $200 (the de minimis rule).

Section 22J(2) provides a list of exempt categories where a person will not have to provide income information to Inland Revenue for:

• income derived by a non-resident seasonal worker;
• income derived as a provider of standard-cost household services (that is exempt income under section CW 61(1) of the Income Tax Act 2007;
• income derived from providing personal services for which personal service rehabilitation payments are made when the taxable income of the individual is not more than $14,000 for the income year and tax has been withheld from the personal service rehabilitation payment at 10.5%; or
• non-resident passive income described in section RF 3 of the Income Tax Act 2007 and derived by a non-resident individual.

These exceptions already exist under the current law, but have been codified in section 22J(2) to make it clear that the proposed changes do not create any unintended obligations for these types of income.

Proposed section 22L requires Inland Revenue to establish an electronic form and means of communication as well as a non-electronic form or mode of delivery for the delivery of other income information to Inland Revenue. This will enable people to submit information either electronically or manually.

Where an individual has provided information on their other income to Inland Revenue the income information will be added to the pre-populated account along with any tax deduction and tax credit information provided by the individual to form the individual’s adjusted account as defined in proposed section 22D(5).

Provision of tax deduction and tax credit information (proposed sections 22D(5) and 22F(3), and proposed schedule 8 table 2)

Proposed section 22F(3) provides that an individual may provide the following information to Inland Revenue on tax deductions and tax credits as set out in schedule 8 table 2:

• deductions;[5]
• tax credits carried forward under section LE 3 of the Income Tax Act 2007;
• tax loss balances, or tax loss components, other than a tax loss component under section LE 2 of the Income Tax Act 2007;
• donations tax credits; or
• amounts of income protection insurance.

Under proposed section 22D(5) this information will be added to the information in the pre-populated account, and any other income information provided to form the individual’s adjusted account.

Knowledge based requirement to correct missing or incorrect reportable income (proposed section 22F(2))

Proposed section 22F(2) confirms that an individual has no obligation to provide reportable income information that has not been included in their pre-populated account to Inland Revenue unless they know or might reasonably be expected to know that the information in their pre-populated account is incomplete or incorrect. This section confirms that individuals are entitled to rely on the information in their pre-populated account unless they know it is wrong or they ought to have known that it was wrong.

When an adjusted account converts into a self-assessment (proposed sections 22D(6)(c), 22G(2) and 22I contained in new subpart 3B)

Under proposed section 22D(6)(c), an adjusted account will become final (and therefore an assessment under proposed section 22I(1)) when:

• the individual has confirmed the adjusted account as correct and complete under proposed section 22G(2); or
• Inland Revenue has notified the individual under proposed section 22I(2)(b) that Inland Revenue is satisfied that their adjusted account correctly and completely records their income for the corresponding income year.

The assessment will determine the individual’s tax position as either a refund due or an amount of tax to pay. This treatment is explained in detail in the next commentary item.

Assessments when Inland Revenue is not satisfied that information is correct and complete (proposed section 22I(2)(c) and amended section 106)

Proposed section 22I(2)(c) provides that an assessment arises when Inland Revenue advises an individual that it is not satisfied that their information in their pre-populated account or their adjusted account is correct and complete and issues a default assessment under the proposed amended section 106.

Proposed new section 106(1A) gives Inland Revenue the power to make an assessment of the amount of income subject to tax where Inland Revenue considers that the information provided in the individual’s final account for a tax year is not likely to be correct. Proposed section 106(1B) provides that tax assessed under proposed section 106(1A) is payable by the individual unless the individual disputes the assessment under section 89D.

The proposed amendment to section 89D that replaces subsection 89D(2B) requires an individual to dispute a default assessment as described in 22I(2)(c) by making an adjustment to their final account for the tax year.

Error correction before an account is confirmed or an assessment is made (proposed sections 22F(4) and 22H(2))

Proposed section 22F(4) allows an individual to change the information contained in their pre-populated or adjusted account at any time before the individual has confirmed the account under proposed section 22(G), or an assessment is made under section 22I(2). This assessment would occur where:

• Inland Revenue was satisfied the information was correct and complete and notified the individual; or
• where Inland Revenue was not satisfied that the information was correct and complete and issued a default assessment.

Under proposed section 22H(2), Inland Revenue can amend information in the individual’s pre-populated account, or adjusted account for the tax year, to correct errors in the information and must immediately notify the individual of the amendment.

Error correction after an assessment is made (proposed sections 22H(3)and (4), and section 108(1))

Proposed section 22H(4) provides that an individual can ask Inland Revenue to amend the information contained in their final account under existing section 113 where they discover an error once an assessment has been made. Section 113 allows Inland Revenue to amend an assessment when it is necessary in order to ensure its correctness.

Proposed section 22(H)(4) allows Inland Revenue to amend the information in an individual’s final account to correct errors in the final account at any time up to the end of the time bar period in section 108(1) and requires Inland Revenue to notify the individual of the amendment.

Section 108(1) restricts Inland Revenue from amending a return if four years have passed since the end of the tax year in which the return was filed. However, this does not apply where the return is fraudulent, wilfully misleading, or omits all mention of income of a particular nature or derived from a particular source.

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REFUNDS OF TAX AND AMOUNTS OF TAX TO PAY

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(Clauses 21, 44, 97, 98 and 206)

Summary of proposed amendment

Amendments are proposed to improve the process for issuing refunds and advising individuals that they have tax to pay, or are due a refund. This should remove unnecessary compliance costs currently being incurred by individuals. The proposed changes are:

• Inland Revenue would calculate whether people who are not expected to be required to provide information to Inland Revenue were entitled to a refund or had tax to pay.
• Refunds would be paid out without individuals having to request them.
• Inland Revenue would issue income tax refunds by direct credit, unless that would result in undue hardship or is not practicable.
• Amounts of tax to pay arising from withholding tax regimes where tax was withheld in accordance with the PAYE rules, or where tax was withheld at the rate corresponding to the individual’s marginal tax rate, would not have to be paid.
• Amounts of tax to pay arising from a withholding tax regime where less than $200 of income was taxed incorrectly would not have to be paid.

Application date

The proposed amendments will come into force on 1 April 2019, and will apply for the tax year-end processes for the tax year ended 31 March 2019.

Key features

Inland Revenue will automatically calculate whether an individual is entitled to a refund where it is reasonably satisfied that it has the necessary information. If the individual is entitled to a refund Inland Revenue will pay it out by direct credit automatically, regardless of the amount due. Similarly, amendments are proposed that will enable Inland Revenue to simplify compliance obligations for individuals with tax to pay who are subject to withholding tax regimes.

Background

Under the current law, individuals are responsible for determining whether they are required to file a return, or whether they need to take any action to finalise their tax position.[6] Taxpayers who are not required to file returns do not have their tax positions squared up automatically. If these taxpayers want to determine whether they have tax to pay or are due a refund, they must interact with Inland Revenue (for example, by requesting a personal tax summary). Non-filing taxpayers can be selective and, based on their summary of earnings, request a personal tax summary only in years where a refund is due. The current approach does not accord with the Government’s objective of making tax simpler for individuals, and there is an integrity issue with taxpayers being able to “cherry pick” refunds.

The proposed amendments will simplify the rules so that more individuals can understand their obligations and meet those obligations with minimal effort. If an individual who is not required to provide additional tax information is due a refund or has tax to pay, then Inland Revenue will calculate this automatically. Refunds will be paid out without an individual having to interact with Inland Revenue to request them and Inland Revenue will contact individuals and inform them of any outstanding tax to pay.

Amounts of a tax to pay arising from income of $200 or less that has been incorrectly taxed under a withholding tax regime will not have to be paid. Any amounts of tax to pay arising from withholding tax regimes where tax was withheld in accordance with the PAYE rules, or where tax was withheld at the rate corresponding to the individual’s marginal tax rate, would also not have to be paid.

Detailed analysis

All references are to the Tax Administration Act 1994 unless otherwise stated.

No obligations to provide information: de minimis and certain other amounts (section 22J contained in new subpart 3B)

Proposed new section 22J sets out the circumstances in which an individual will not have to provide income information to Inland Revenue. Section 22J(1) provides that an individual will not have to provide information for a tax year if the individual derives other income below a $200 de minimis threshold.

Section 22J(2) provides a list of exempt categories where a person will not have to provide income information to Inland Revenue (for example, income derived by a non-resident seasonal worker). These exceptions already exist under the current law, but have been codified in section 22J(2) to consolidate the rules for individuals into Part 3B.

Power of Commissioner in relation to refunds or tax payable (section 174AA(b) amended)

The proposed amendment to section 174AA(b) removes the $5 refund threshold. Refunds will now be paid out by direct credit regardless of the amount. The proposed amendment also provides that the Commissioner will not require amounts of tax payable to be paid where the tax was withheld in accordance with the PAYE rules or where the tax was withheld at the individual’s marginal tax rate. Amounts of tax to pay arising from a withholding tax regime where less than $200 of income was taxed incorrectly would also not have to be paid.

The following examples demonstrate what would occur under the proposed amendment if an individual had the incorrect amount of tax withheld, but the tax was withheld in accordance with the PAYE rules.

Section 174AA(b) also ensures that those receiving certain payments from the Ministry of Social Development (MSD) are not subject to overpayments of tax. For example, if MSD make a lump-sum back payment to a client, but do not correctly gross up the tax payment to Inland Revenue, it will show at year-end that there is an underpayment of tax, despite the individual receiving the correct net entitlement. In this situation the client would not be liable for the amount of tax to pay.

This section also preserves the current law in relation to payments to non-resident seasonal workers and providers of standard-cost household services. Similarly, the threshold set out in section 174AA(a), which provides that amounts of tax to pay of less than $20 will not have to be paid, will also be retained.

Refund of tax paid in excess made by direct credit to bank account (section 184A amended)

Section 184A(2) will be amended to reflect that taxpayers will no longer need to claim refunds, as they will be issued automatically.

Section RM 5 of the Income Tax Act 2007 abolished (overpayment on income statements)

This section applied where an income statement (personal tax summary) had been provided to a person and there was an amount of tax to be refunded exceeding $600. The section provided that the Commissioner could refund this amount only after the person confirms that the income statement was correct.

It is proposed that this section is repealed as all refunds, regardless of amount, will now be issued automatically once an account is deemed final in accordance with section 22D(6) and has become an assessment.

Section 43 – Income tax returns and assessments by executors or administrators

Section 43(4) and 43(5) of the Tax Administration Act 1994, which establish obligations on an executor for a deceased taxpayer’s tax liabilities, will also be repealed. These sections provided that the executor must request an income statement in some cases (section 43(4)), and may request an income statement if the taxpayer would have met the requirements of section 33AA(1) (section 43(5)).

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REPEAL OF INCOME STATEMENT RULES AND OTHER CONSEQUENTIAL AMENDMENTS

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(Clauses 6, 13, 34, 35, 39, 40, 41, 43, 47, 48, 51, 52, 68, 69, 71, 74, 89, 92, 93, 94, 101, 127, 187, 188, 189, 200, 239, 240, 244 and 265)

Summary of proposed amendment

As a consequence of the changes to individual’s income filing, some of the current law governing individual’s income tax obligations will be repealed. Consequential amendments are also proposed to align the current law with the proposals in the Bill. The proposed changes are:

• Part 3A (Income statements) of the Tax Administration Act 1994 will be repealed.
• Section 33AA of the Tax Administration Act 1994 will be repealed.
• Sections 33C, 33D along with 15B(h) and 15B(i) of the Tax Administration Act 1994 will be repealed.
• A number of consequential amendments will be made to give effect to the new reporting of income rules for individuals in Part 3, subpart 3B of the Tax Administration Act 1994. These consequential amendments will be made to the following Acts:
  • Tax Administration Act 1994;
  • Income Tax Act 2007;
  • Child Support Act 1991;
  • Student Loan Scheme Act 2011; and
  • Accident Compensation Act 2001.

Application date

The proposed amendments will come into force on 1 April 2019.

Background

The proposed legislative changes set out in the previous five commentary items prescribe the way in which individuals will interact with Inland Revenue in relation to the income tax system. This means that current mechanisms of filing, such as income statements (personal tax summaries) and IR3 forms, will be replaced by a pre-populated account that includes all information that Inland Revenue knows about the individual. People who only earn “reportable income” will not have to do anything, and only those people who earn income that Inland Revenue does not know about, will have to provide further information to Inland Revenue. In order to give effect to these changes some of the current law will need to be repealed and amended.

Detailed analysis

The following section provides an overview of the law in the Tax Administration Act 1994 that is proposed to be repealed.

Part 3A repealed (income statements)

Part 3A sets out the law on income statements and comprises of sections 80A to 80I inclusive. It is proposed that Part 3A is repealed.

Sections 33AA repealed (exceptions to requirement for return of income)

Section 33AA provides that an individual will not be required to file a return if they, in addition to satisfying a number of other criteria, derive $200 or less of certain types of income from which tax has not been withheld or not withheld incorrectly.

It is proposed that section 33AA is repealed. Under the new proposals in subpart 3B, an individual who earns reportable income will not have to provide income information to Inland Revenue, and only those who earn income that Inland Revenue does not know about (“other income”) will be obliged to provide information to Inland Revenue. This information will be used for the purposes of determining a final account under proposed section 22D(6)(a)(ii), and therefore an assessment under proposed section 22I(2)(c).

Proposed section 22J(1) replaces section 33AA(2) and provides that an individual will not have to provide information for a tax year if the individual derives other income of less than $200 (the de minimis rule).

Section 15B (h) and (i) repealed (taxpayer’s tax obligations)

Section 15B(h) and (i) imposes obligations on taxpayers in relation to income statements. These sections are proposed to be repealed.

Sections 33C and 33D repealed (returns not required for certain providers of personal services and for non-resident seasonal workers)

Section 33C and 33D exempts certain categories of income earners from filing a return. These sections are proposed to be repealed. These exempt categories are now provided for in proposed section 22J(2) under new subpart 3B.

Consequential amendments

This section lists consequential amendments that are proposed to support the substantive changes on individual’s income tax in the Bill.

Tax Administration Act 1994

Section 4A amended (Construction on certain provisions)
Section 33 amended (Returns of income)
Section 37 amended (Dates by which annual returns to be furnished)
Section 38 amended (Returns to annual balance date)
Section 41 amended (Annual returns by persons who receive family assistance credit)
Section 42C amended (Income tax returns by undischarged bankrupt)
Section 80KM amended (Summary of instalments paid)
Section 89C amended (Notices of proposed adjustment required to be issued by Commissioner)
Section 89D amended (Taxpayers and others with standing may issue notices of proposed adjustment)
Section 92 amended (Taxpayer assessment of income tax)
Section 106 amended (Assessment where default made in furnishing returns)
Section 110 amended (Evidence of returns and assessments)
Section 111 amended (Commissioner to give notice of assessment to taxpayer)
Section 120C amended (Definitions)
Section 139A amended (Late filing penalty for certain returns)
Section 141JA amended (Application of Part 9 to non-filing tax payers)
Section 143 amended (Absolute liability offences)
Section 143A amended (Knowledge offences)
Schedule 5 amended (Certain tax codes and rates)

Income Tax Act 2007

Section CX 27 amended (Assistance with tax returns)
Section RA 13 amended (Payment dates for terminal tax)
Section RB 3 amended (Schedular income tax liability for filing taxpayers for non-resident passive income)
Section RC 3 amended (Who is required to pay provisional tax?)
Section RD 22 amended (Providing employment income information to Commissioner)

Child Support Act 1991

Section 35 amended (Adjusted taxable income)
Section 81 amended (Notification requirement of parents)

Student Loan Scheme Act 2011

Section 34 amended (Repayment codes for New Zealand-based borrowers)
Section 35 amended (Borrowers with “SL” repayment code must notify employers)
Section 36 amended (Employer or PAYE intermediary must make standard deductions from salary or wages)
Section 57 amended (Consequences of exemption from standard deductions)
Section 60 amended (Where exemption from standard deductions ceases to apply)
Schedule 2 amended (Application of PAYE rules for purposes of section 70)

Accident Compensation Act 2001

Schedule 4 amended (Deductions on account of earner levies)

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THE ADMINISTRATION OF DONATION TAX CREDITS

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(Clause 42)

Summary of proposed amendment

Several amendments are proposed to enable Inland Revenue to simplify the administration of donation tax credits. The proposed changes are:

• Donation receipts would be able to be submitted during the year, and could be submitted electronically.
• Donation tax credits would be able to be claimed as part of the income tax year-end process.
• If an individual has already submitted receipts during the year, these will automatically be taken into account without the individual having to fill in a separate claim form.

Application date

The proposed amendments will come into force on 1 April 2019.

Key features

Inland Revenue will simplify the process for claiming donation tax credits by updating its operational practice to accept donation receipts which are submitted electronically via myIR, and submitted during the year. People will still be able to file a separate donation tax credit claim if they choose to do so.

Background

Currently, credits for donations can be claimed at the end of the tax year by filling in a tax credit claim form (IR526), or during the year through Payroll Giving, where the credits are received immediately. An IR526 is a paper based form, and paper versions of receipts must be saved and submitted with this form at the end of the year.

The proposed amendment will simplify the process for claiming donation tax credits and make it more flexible for individuals. Under the proposal, individuals will have the option to submit receipts electronically when they receive them, which reduces the risk that they could be forgotten or lost before being able to be submitted. The tax credit claim process (currently the IR526) will be retained as an option for those who prefer to file their donation tax credit claim separately. At year-end, if a person has submitted donation receipts during the year and Inland Revenue considers the person is entitled to the donation tax credit, the refund will be issued without the need to submit a tax credit claim request.

Returns by persons with tax credits for charitable or other public benefit gifts (section 41A amended)

Proposed new subsection 41A(1) prescribes the ways in which a person may apply to have their tax credit refunded. In practice, a person may:

• upload donation receipts through myIR during the year;
• complete the relevant donation section when providing other income information through the pre-populated account;
• complete a separate return online through myIR (that is, if done after other income information is provided); or
• complete a paper based form.

A consequential amendment has also been made to section 41A(5). The phrase “be signed by a person” has been omitted to reflect the fact that receipts can now be submitted electronically.

Section 41A(6B) ensures that donation tax credit claims are subject to the same time bar rules that apply to income tax returns. This means that the Commissioner cannot amend a tax credit claim (either adjust up or down) after four years have passed from the end of the tax year in which the taxpayer submits the donation tax credit claim.

Section 41A(6) provides that all of the above changes for section 41A will take effect for the 2018–19 and later income years.

1 The recently enacted Taxation (Annual Rates for 2017–2018, Employment and Investment Income, and Remedial Matters) Act 2018 will require employers to provide employment information to Inland Revenue on a payday basis and investment income payers to provide investment income information on a monthly basis.

2 An individual will be treated as having a “zero pre-populated account” where the Commissioner has no information on the individual’s reportable or other income for the relevant tax year. For the purposes of section 22I(2)(c), an assessment will arise when the Commissioner notifies an individual that the Commissioner is not satisfied that the information contained in their pre-populated or adjusted account is correct or complete and issues a default assessment under section 106.

3 This can include the recommendation of a tailored tax rate or code. Tailored tax codes will be covered in the “Tailored (special) tax codes” section.

4 This will be the income that is required to be reported to Inland Revenue by a third party within the year or shortly after the year end and known as “reportable income”.

5 A person is unable to claim a deduction for an expense or loss incurred in deriving income from employment, except if the expenses relate to determining one’s tax liability.

6 Currently a person is not required to file a return if they, in addition to satisfying a number of other criteria, derive $200 or less of certain types of income from which tax has not been withheld or not withheld incorrectly (see section 33AA(1) of the Tax Administration Act 1994).