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Taxation Annual Rates for 201718 Employment and Investment Income and Remedial Matters Bill

Making Tax Simpler – investment income information

OVERVIEW

Clauses 2, 81, 85, 122, 123, 124, 163, 180(2), 210, 211, 212, 215, 218, 219, 220, 224, 239, 241, 246, 269, 284 and schedule 2

A central component of the Government’s objective of modernising tax administration in New Zealand is to improve information flows to Inland Revenue. This will allow Inland Revenue to provide smoother service to customers, including pre-populating individuals’ tax returns.

This Bill contains proposals to improve the administration of investment income information. Investment income refers to interest, dividends, portfolio investment entity (PIE) income, taxable Māori authority distributions and royalties.

The proposed amendments aim to reduce compliance costs for recipients of investment income and administrative costs for Government, by improving the administration of investment income to enable the pre-population of tax returns and to ensure that taxpayers’ tax obligations and social policy entitlements and obligations are calculated more accurately during the year.

Inland Revenue currently receives limited and infrequent information about the investment income that taxpayers earn and the tax withheld or paid on that income. For interest subject to resident withholding tax (RWT) or non-resident withholding tax (NRWT) and PIE income, Inland Revenue only receives information about the income taxpayers earned and the tax deducted from that income after the end of the tax year. For dividends, Māori authority distributions and interest income that is exempt from RWT or subject to the approved issuer levy (AIL), Inland Revenue only receives information about the amounts received by recipients when it is specifically requested, or is included by the recipient in their tax return.

The key changes relate to the following:

  • obtaining more frequent and detailed information for interest, dividends and Māori authority distributions;
  • bringing forward the due date when PIEs are required to provide information to Inland Revenue;
  • encouraging the provision of IRD numbers;
  • increasing electronic filing;
  • improving the administration of RWT exempt-status (certificates of exemption);
  • removing some requirements to provide end-of-year withholding tax certificates; and
  • improving error correction.

Twelve submissions were received on the amendments. While there was general support for the rationale behind the changes, the main concern was that the proposals overreach and are not justified as the costs imposed on payers of investment income exceed the benefits to the tax system as a whole. The majority of the submissions focussed on ways to reduce these compliance costs.

Officials consider that changes to the administration of investment income are necessary to improve services to taxpayers, however recommend the following changes to address submitters’ concerns of overreach:

  • removing the requirement that payers report detailed information on payments made to payees with RWT-exempt status;
  • removing the requirement for taxpayers with RWT-exempt status to provide detailed information in relation to the acquisition or disposal of financial arrangements;
  • removing the requirement for PIEs to report investor’s prescribed investor rates (PIRs) six-monthly;
  • allowing public unit trusts to report dividend information annually;
  • reducing information reporting requirements for information that has not been digitised;
  • extending the error correction provisions to PIEs and non-cash dividends;
  • clarifying the scope of reporting requirements in relation to joint accounts held by companies and trusts; and
  • incorporating the information required by the company dividend statement into monthly reporting.

INVESTMENT INCOME INFORMATION GENERALLY

Issue: General support for amendments to investment income information

Submission

(Belmont Partners, BusinessNZ, EY, New Zealand Bankers Association, Chartered Accountants Australia and New Zealand, ANZ, KPMG)

The submitters agree in principle with the rationale behind the changes to investment income information.

Recommendation

That the submitters’ support be noted.

Issue: The costs and benefits of monthly reporting

Submission

(BusinessNZ, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, Financial Services Council, KPMG, Olivershaw)

Submitters consider that the cost of monthly reporting outweighs the benefits. Investment income can be received at year-end to pre-populate tax returns. The only remaining justifications to get the information monthly are to proactively correct tax rates and adjust social policy payments. These benefits are overstated and do not justify the cost of monthly reporting as:

  • High income taxpayers, who pay the bulk of the taxes, have more complex tax affairs and will not benefit from the savings unless the accruals basis of individuals’ taxation is changed.
  • Many lower income taxpayers, representing the majority of taxpayers and of social policy payment recipients, will have little or no investment income.
  • For the small remaining group of taxpayers with investment income subject to withholding who do not need to make accrual adjustments to that income, income is likely to be realised in an uneven and unpredictable pattern during the income year, making within-year adjustments to social policy payments difficult.

Investment income information should be provided quarterly or annually, not monthly.

The proposals inappropriately shift costs from government to the private sector.

The proposals are not robust enough to be enacted in their current form – further work and a full cost-benefit analysis should first be undertaken.

To reduce compliance costs, the proposals should be better targeted toward those paying an amount of investment income above a minimum threshold.

Comment

Payers of investment income will already have the information that is required to be provided to Inland Revenue at the point they pay the income to the taxpayer. Inland Revenue is therefore simply asking for information that payers already hold. While providing this information monthly may involve some upfront system configuration costs, the compliance costs are not expected to be significant going forward.

Receiving this information on a monthly basis will enable Inland Revenue to proactively adjust taxpayers’ social policy payments and tax rates. This will reduce the number and quantum of end-of-year square ups, improving taxpayer compliance and reducing compliance costs, thereby improving the overall efficiency of the tax system.

Officials disagree with the submitters’ suggestions that payers of investment income report less frequently than monthly, or that the proposals are targeted at those paying an amount of investment income above a minimum threshold. The RWT rules are currently targeted at payers paying interest above $5,000 per year. Information reporting on interest paid that is below this threshold is only required in limited circumstances.

Recommendation

That the submission be declined.

Issue: Support for application date of investment income provisions

Clause 2

Submission

(KPMG)

KPMG supports a 1 April 2020 mandatory application date as this provides investment income providers with sufficient time to transition to the new requirements.

Recommendation

That the submitter’s support be noted.

Issue: Application date for provision of investment income information should be deferred

Clause 2

Submission

(EY)

The proposed amendments should come into force on 1 April 2021, with the rules able to be applied voluntarily from 1 April 2020.

An extra year to make systems changes would be helpful for organisations that operate numerous systems that deal with many different tax types.

Comment

Officials consider that (an estimated) 24 months from the date of enactment of the legislation is a sufficient amount of time for systems development and have discussed this timeframe with a number of investment income payers. Those payers have generally accepted the timeframes as being manageable.

Recommendation

That the submission be declined.

Issue: Engagement and partnership between Inland Revenue and investment providers

Submission

(AMP, ANZ, New Zealand Bankers Association)

Inland Revenue should engage with AMP and the PIE industry regarding the nature and form of the electronic reporting in proposed new sections 25J and 25K. (AMP)

Significant and ongoing partnership between impacted taxpayers and Inland Revenue is required:

  • to obtain clarity and certainty of detail on the proposed changes in order to embark on systems development;
  • to ensure unified communication occurs to as many New Zealanders as possible regarding the upcoming changes, particularly in regard to the increase of the non-declaration rate on interest income to 45%; and
  • in relation to the proposed gateway for electronic filing. (ANZ, New Zealand Bankers Association)

Comment

Inland Revenue is committed to working with investment income payers to ensure a seamless transition to the new requirements. Inland Revenue has appointed a number of account managers to engage with the private sector on various aspects of Inland Revenue’s Business Transformation programme, including the proposed changes to investment income information.

Recommendation

That the officials’ comments be noted.

MEASURES TO REDUCE COMPLIANCE COSTS

Issue: Provision of information that is not easily accessible

Clauses 212 and 284

Submission

(AMP, ANZ, Corporate Taxpayers Group, New Zealand Bankers Association)

Submitters were of the view that the following information should only have to be provided if it is held and reasonably accessible (that is, it has been digitised):

  • joint investor information; (AMP)
  • joint investor information and date of birth; (ANZ, New Zealand Bankers Association) and
  • joint investor information, date of birth and IRD number. (ANZ, New Zealand Bankers Association, Corporate Taxpayers Group)

Comment

In order to reduce compliance costs for payers, officials agree with the submitters that information on joint owners and date of birth information that has not been digitised should not have to be provided to Inland Revenue. However, officials recommend that this only applies to any records received by the payer prior to 1 April 2018. Records received after 1 April 2018 should be provided to Inland Revenue, even if received or held in paper format.

Officials disagree with the submission that IRD numbers should only need to be provided where held in a digital format. An IRD number is a unique identifier and as such is a critical piece of information for Inland Revenue to receive as it enables income to be attributed to the correct investor.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Optionality for provision of combined or separate information

Submission

(ANZ, New Zealand Bankers Association)

The Bill is silent on how investment income information should be provided to Inland Revenue. Flexibility should exist for investment income information to be provided in either combined or separate formats. This will reduce compliance costs of payers by aligning with how information is stored across multiple systems, for example, it would be preferable to provide dividend information separately as such information is obtained from manual processes or from third parties.

Clarification on this topic should be provided through the Bill or through subsequent guidance from the Commissioner to ensure systems can be developed.

Comment

Officials agree with the submitters and guidance will be issued by the Commissioner.

Recommendation

That the submission be accepted.

Issue: Flexibility to provide cumulative or month by month information

Submission

(ANZ, New Zealand Bankers Association)

The Bill is silent on whether investment income information should be provided in cumulative format (that is, year to date) or non-cumulative format (that is, month by month). ANZ recommends that the Bill (or subsequent guidance) clarify that the information can be provided in either format. This will minimise compliance costs by aligning with how information is produced by payers’ systems. For example, it is easier to provide cumulative information about interest income as this aligns with ANZ’s systems, but this is not the case for certain dividend income.

Comment

Officials agree that clarity is needed on whether reporting will be month by month or cumulative. Using one method will reduce the risk of error. Officials therefore recommend that the Bill is amended to require investment income information in a month by month format.

Recommendation

That the submission be declined, subject to officials’ comments.

Issue: End-of-year withholding tax certificates

Clause 211

Submission

(ANZ, Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand, New Zealand Bankers Association, KPMG)

Submitters support the removal of the requirement to provide annual withholding tax certificates where the taxpayer has provided their IRD number, but consider a significant benefit will not result from this as financial institutions already have the systems in place to provide these certificates and are likely to continue to do so. (ANZ, Corporate Taxpayers Group, New Zealand Bankers Association, KPMG).

Submitters have concerns with the removal of this requirement as it does not address the implications of taxpayers having to verify their year-end tax position. For example, verification of the allocation of income from jointly held investments may be problematic without a year-end certificate. (Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group)

Comment

While the requirement to provide annual withholding tax certificates will be removed, this does not prevent payers of investment income continuing to provide these certificates to their customers if they are concerned about their customers being unable to verify their year-end tax position.

Recommendation

That the officials’ comments be noted.

Issue: Streamlining information reporting

Submission

(KPMG)

Consideration should be given to how provision of investors’ identity information to Inland Revenue could be streamlined, such that only information that is “variable” in nature – for example, tax rate, the amount of investment income and tax deducted – is required to be transmitted periodically.

Comment

Large payers of investment income will be required to provide all the required information with each report as they will be providing this information in specialised files. For smaller payers of investment income, Inland Revenue will pre-populate online forms with non-variable information such as the name, date of birth and IRD number of the taxpayer that has been provided by the payer in previous returns.

Recommendation

That the officials’ comments be noted.

Issue: Overlap with other investor information collection regimes

Submission

(KPMG)

Officials should consider how the various investor information collection regimes (that is, US FATCA, the new Common Reporting Standard, and non-tax “Know Your Client” information requirements such as anti-money laundering/countering the financing of terrorism laws) can be rationalised to reduce costs on affected entities. There is significant overlap in information collected under these different regimes. This consideration should be undertaken in consultation with affected financial institutions and investment providers to ensure a practical solution.

Comment

Officials met with a number of registered banks as the proposals for inclusion in the discussion document were being developed. They were all of the view that it would be easier to provide the information separately, rather than to determine what information had already been provided under other reporting regimes.

Recommendation

That the submission be declined.

PORTFOLIO INVESTMENT ENTITIES

Issue: Six monthly reporting of Prescribed Investor Rates (PIRs) by multi-rate Portfolio Investment Entities (PIEs)

Clause 212

Submission

(AMP, Corporate Taxpayers Group, KPMG)

The submitter supports the provision of PIRs six monthly (AMP).

An investor’s PIR is set with reference to their prior years’ income, therefore reporting PIRs annually would be sufficient. If Inland Revenue has concerns and wants to investigate the PIR of investors, they could request this from the particular PIE fund manager. (Corporate Taxpayers Group)

PIR reporting should only be required where there has been a change since the last reporting (KPMG).

Comment

Proposed new sections 25J and 25K in clause 212 of the bill currently require multi-rate PIEs to provide PIR information 6-monthly. Officials agree with the submitters that annual PIR reporting will be sufficient in most cases and consider that the status quo should be retained. Where Inland Revenue wishes to investigate the PIR of a particular investor, they will request this information from the PIE fund manager.

Recommendation

That the submission is accepted in part, subject to officials’ comments.

Issue: Advancing the filing deadline from 31 May to 15 May for non-locked in PIEs

Clauses 212 and 246

Submission

(Chartered Accountants Australia and New Zealand, KPMG)

Chartered Accountants Australia and New Zealand supports the proposal to bring forward the reporting date for multi-rate PIEs that are not superannuation funds or retirement schemes from 31 May to 15 May following the end of the income year. (Chartered Accountants Australia and New Zealand)

KPMG cannot see how bringing forward the reporting date by two weeks will materially improve the calculation of social policy obligations/entitlements. (KPMG)

Comment

Bringing forward the reporting date from 31 May to 15 May for non-locked in PIEs (proposed new section 25J in clause 212) will allow the PIE information to be pre-populated in taxpayers’ tax records sooner. This will enable the information to be automatically included in social policy income declaration forms (for Working for Families, child support and student loans) as well as enabling the income and tax credits to be pre-populated into income tax calculations where the taxpayer has selected a PIR that is too low. In addition, the information will be available to calculate the taxpayer’s PIR for the following year at the time they would potentially look at their tax information. Each of these benefits is dependent on the PIE income information being pre-populated as soon as possible after the end of the tax year as the tax return and social policy processes need to be completed within a fixed time from the tax year end.

Recommendation

That the officials’ comments be noted.

Issue: Further information as required by the Commissioner – PIEs

Schedule 2

Submission

(Financial Services Council)

The ambit of the provision to require further information as required by the Commissioner should be clarified in relation to PIEs.

Comment

This provision, in proposed new schedule 6 (schedule 2 of the bill), is intended to allow the Commissioner of Inland Revenue some degree of flexibility in setting the reporting that is required and is reproducing what is already required by section 57B of the Tax Administration Act 1994. Section 57B has been used to date by the Commissioner to specify the filing requirement for PIEs in the guide Inland Revenue produces (IR860).

Recommendation

That the submission be declined.

Issue: PIE filing due date – incorrect application date

Clauses 2 and 246

Submission

(Matter raised by officials)

Clause 246(4), which changes the PIE filing due date from 31 May to 15 May, should be amended to apply from the 2018–2019 income year (that is, year ending 31 March 2019).

Comment

The PIE filing due date change currently applies from 1 April 2018. This would have the effect of requiring the 2018 return to be filed by 15 May. It was intended that the earlier date apply to the 2019 and later returns, not the 2018 return.

Recommendation

That the submission be accepted.

ERROR CORRECTION

Issue: Support for error correction proposals and extending them to PIEs

Clause 122

Submission

(AMP, ANZ, Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand, EY, Financial Services Council, New Zealand Bankers Association, KPMG)

The submitters support the proposed amendments relating to correcting errors in the following year without the imposition of penalties or interest (AMP, ANZ, Corporate Taxpayers Group, Chartered Accountants Australia and New Zealand, New Zealand Bankers Association, KPMG).

There is no need to defer the application of the error correction provisions until the new investment income reporting requirements take effect (KPMG).

The error correction provisions should be extended to include multi-rate PIEs (AMP, ANZ, EY, Financial Services Council, New Zealand Bankers Association, KPMG).

Comment

Officials agree with the submitters and recommend that PIEs are able to correct errors within one month of their discovery, by adjusting the investor’s accruing tax liability in the fund, without the imposition of penalties or interest:

  • during the year (no limit on the total amount of adjustments); or
  • in the following tax year, provided the total adjustments for that year, relating to the previous year, do not exceed the greater of $2,000 or 5 percent of the PIE’s tax liability for that previous year (that is, the year in which the error occurred).

The error correction provisions are intended to apply from when the new investment income reporting requirements take effect to reduce the burden of more frequent reporting.

Recommendation

That the submission is accepted in part, subject to officials’ comments.

Issue: Error correction notification

Submission

(ANZ, New Zealand Bankers Association)

Notification to Inland Revenue of errors should occur separately from monthly electronic filings.

The Bill is silent as to how the IRD will seek correction of information if it becomes aware of errors. This could arise, for example, if the IRD identifies that a taxpayer is using an incorrect withholding rate. ANZ recommends that any communication to change the rate should come from Inland Revenue, as Inland Revenue holds the information on the taxpayer’s total income, and therefore can best determine the appropriate rate.

Comment

Corrections made in the same tax year do not require reporting to Inland Revenue. As corrections made in the following tax year can be made by adjusting a subsequent payment to the payee, it is important that information on this correction is provided at the same time as the information on that subsequent payment is provided to Inland Revenue, so that income is allocated to the correct tax year.

Officials agree with the submitter that Inland Revenue will be better placed to advise of corrections to withholding tax rates. It is recommended that section 25A(2) of the Tax Administration Act 1944 is amended to provide that if the Commissioner notifies the payer that the payee is on an incorrect marginal rate, the Commissioner must also notify the payee.

Recommendation

That the submission be accepted in part, subject to officials’ comments.

Issue: Error correction mechanisms

Clause 122

Submission

(Chartered Accountants Australia and New Zealand, EY)

While the proposed de minimis rule allows withholding tax to be corrected in a subsequent period, it does not assist when amounts are above the threshold or the under-deduction is discovered after the payee has been assessed. (Chartered Accountants Australia and New Zealand)

No limit should be put upon the level of self-correction of errors given no tax is at stake, with any differences being of timing only. Inland Revenue would retain protection from any financial institutions deliberately under-reporting withholding taxes, as full disclosure is required and all other record keeping requirements and anti-avoidance laws within the tax acts would continue to apply. (EY)

Comment

A limit on the amount that could be corrected in the next tax year without the imposition of penalties or interest is necessary to prevent the deferral of tax. The timing difference may result in a significant revenue cost if a large error was not corrected until several years later.

Recommendation

That the submission be declined.

Issue: Error correction threshold

Clause 122

Submission

(Matter raised by officials)

The error correction threshold for corrections between tax years in clause 122(3) (proposed section RA 11(3)(b)) should be amended to provide that all adjustments made by the payer cannot exceed 5 percent of the payer’s withholding liability for the year, rather than just the adjustment in question.

Comment

The error correction mechanism in section RA 11 provides that where a payer does not withhold enough tax from a payment of income to the payee, the payer may correct the error by subtracting from a later payment to the payee an amount to correct the deficiency. Clause 122 amends this provision to allow for the adjustment to be made in the next tax year, provided it is no more than the greater of $2,000 or 5 percent of the payer’s withholding liability. As the threshold is based on the adjustment in question, rather than all adjustments made by the payer in the tax year, there is effectively no error correction threshold. No single payee adjustment is likely to equate to 5 percent of the payer’s total RWT/NRWT liability. The threshold should state that total corrections made in the following year cannot exceed 5 percent of the payer’s liability for the year that the correction relates to, not just the particular correction in question.

Recommendation

That the submission be accepted.

Issue: Correction of errors in the following year

Clause 122

Submission

(Matter raised by officials)

Section RA 11(3) should be amended to provide that the error must be corrected in the next reporting period following its discovery provided it is reasonably practical to do so.

Section RA 11(6) should be amended to require the payer to notify the Commissioner of an adjustment made under RA 11(3)(b) at the time the adjustment is made.

Comment

Section RA 11 provides that an underpayment error (where not enough tax has been withheld) may be corrected by withholding an amount from a later payment to the payee. It provides that the later payment must be made in the same tax year, or in the next tax year provided the adjustment is within a threshold. The result of this is that a taxpayer could discover an error at the beginning of a tax year, and not correct it until the end of the following year. This was not intended. It was intended that following discovery of the error, it should be corrected in the next available reporting period, with some allowance made for where it would not be reasonably practical to do so (for example, if an error was discovered immediately prior to a payment being due to the investor, it would be acceptable to wait and correct it in the next payment so as to avoid any delays in processing the payment).

Section RA 11(6) provides that a payer must notify the Commissioner, at the earliest possible opportunity, of an adjustment made in the following tax year, or by the next reporting date for the investment income type in question. It is important that Inland Revenue receives information on the correction at the time it is made so that Inland Revenue knows which income year it relates to.

Recommendation

That the submission be accepted.

Issue: Error correction mechanism for excess amounts

Clause 123

Submission

(Matter raised by officials)

Section RA 12(2) and RA 12(3) should be amended to provide an error correction mechanism for when a payer withholds an excess amount of NRWT.

Section RA 12(5) and RA 12(6) should be amended to ensure excess tax paid is not refunded twice.

Comment

Section RA 12(1) states that the section applies to RWT and NRWT, but the error correction mechanism in RA 12(2), which allows the payer to repay the excess amount to the payee, is currently limited to resident passive income. Section RA 12(2) and RA 12(3) should be amended to apply to NRWT.

Section RA 12(5) provides that if the tax has already been paid to the Commissioner, the Commissioner must refund the excess amount to the payee. If the Commissioner has refunded the excess amount to the payee, RA 12(6) provides that the payer may subtract the amount from a later payment to the Commissioner, or apply for a refund. The result of this would be to effectively refund the excess twice.

Example

Suppose a payer pays the payee $77 ($100 gross income, $33 tax deducted, instead of $10.50, that is, tax is over-withheld by $22.50). The Commissioner then refunds $22.50 to the payee, resulting in Inland Revenue collecting $10.50 of tax. If the Commissioner was to allow the payer to get a refund of the amount over-withheld, or allow it to be deducted from a subsequent payment, the net effect would be: $89.50 to the payee, $22.50 to the payer, and negative $12 to Inland Revenue.

It appears to be an inconsistency in the Income Tax Act. The equivalent to section RA 12 in the 2004 Act was sections NF 6, NF 7, NG 16 and NG 16A. These sections provided that where an excess deduction of RWT or NRWT was made:

  • The Commissioner must refund the excess deduction to the payee, or to the payer where the payer has already paid the amount of the excess to the payee.
  • Where the payer has refunded the amount to the payee and has not received a refund from the Commissioner, the payer may offset the amount from subsequent tax payable to the Commissioner.

Sections RA 12(5) and (6) should be amended to reflect this.

Recommendation

That the submission be accepted.

Issue: Tax payments arising from an error

Clause 124

Submission

(Matter raised by officials)

Sections RA 15(5) and RA 15(6) should be repealed.

Comment

Sections RA 15(5) and RA 15(6) provide that where there is an error and an amount remains unpaid, the person must pay it to the Commissioner no later than 20 April after the end of the tax year. The proposed amendments to section RA 11 in clause 122 provide that an underpayment error can be corrected by subtracting an amount from a subsequent payment to the payee. This amount is then paid to the Commissioner at the relevant reporting date for the subsequent payment, which is the 20th of the following month per section RA 15(2), not after the end of the year as suggested by section RA 15(6). Sections RA 15(5) and RA 15(6) should be repealed.

Recommendation

That the submission be accepted.

DIVIDENDS

Clause 212

Issue: Application to deemed and non-cash dividends

Submission

(Belmont Partners, AMP, Corporate Taxpayers Group)

The legislation should specifically clarify whether the proposals apply to deemed dividends and non-cash dividends. (Belmont Partners)

The dividend reporting requirements should only apply to taxable cash dividends provided to shareholders. (AMP)

In many instances companies may not be aware that the manner in which they have transacted with a shareholder could constitute a dividend for tax purposes until after the fact when tax advice is sought when preparing tax returns. The investment income reporting rules should only apply to cash dividends. (Corporate Taxpayers Group)

Comment

Officials disagree with the submission. Deemed and non-cash dividends are still part of a taxpayer’s income. Information on this income, as required by proposed new section 25G in clause 212, will be necessary for pre-population and to proactively adjust tax rates and social policy payments.

However, officials sympathise with Corporate Taxpayer Group’s submission and recommend that the error correction provisions in clause 122 are extended to cover this situation. Clause 122 provides that an underpayment error (that is, where not enough tax has been withheld) may be corrected by withholding an amount from a later payment to the payee or by recovering the amount from the payee. This would not work for non-cash dividends as the tax is calculated by grossing-up the payment. Extending the error correction provisions allow a company that has genuinely misunderstood the tax consequences of their transaction to return the tax and associated information the following year without the imposition of penalties or interest. Payers would make a correction by grossing-up the payment for the tax (provided this adjustment meets the thresholds for corrections made in the following tax year).

Recommendation

That the submission be accepted in part, subject to officials’ comments.

Issue: Company dividend statement

Submission

(Belmont Partners)

The requirement to provide company dividend statements to Inland Revenue should be repealed as Inland Revenue will already be obtaining the information under the proposed changes.

Comment

Officials agree with the submitter. Instead of having a separate company dividend statement, officials recommend that the additional information required by the company dividend statement that is not covered by monthly reporting be added to the monthly reporting requirements, and the company dividend statement requirement removed.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Deemed dividends and public unit trusts

Submission

(AMP)

Taxable deemed dividends on withdrawals from a public unit trust can accrue to either the fund manager or withdrawing investor (depending on the withdrawal method), where the unit trust has not elected into the PIE rules. Most commonly this is seen in legacy public unit trusts where system constraints have prevented PIE election. Deemed dividends are subject to imputation and RWT. Given the legacy nature of these products, with many in run-off across the industry, AMP submits that taxpayer level information is most efficiently reported on an annual basis.

Comment

Officials agree with the submitter and recommend that dividend reporting for public unit trusts is due annually by 15 May after the end of the tax year.

Recommendation

That the submission be accepted.

Issue: Dividend information and foreign companies

Submission

(ANZ)

The Bill should clarify that foreign companies are not required to provide detailed investor information.

Comment

To provide certainty, officials recommend that proposed new section 25C (in clause 212) is amended to refer to resident passive income subject to a withholding obligation under sections RE 3 and RE 4 of the Income Tax Act 2007.

Recommendation

That the submission be accepted.

Issue: Reporting requirements for dividends between wholly-owned companies

Submission

(AMP, ANZ, Corporate Taxpayers Group)

Dividends paid between wholly-owned companies should be exempt from the reporting requirements, as this information is more efficiently reported through disclosures in annual income tax returns. (AMP, ANZ)

There should be no need to provide more frequent reporting on exempt dividends paid between companies than is currently the case. (Corporate Taxpayers Group)

Comment

Dividends paid between wholly-owned companies are currently exempt from the reporting requirements in the Bill. These dividends are excluded from the definition of resident passive income per section RE 2(5)(a). Proposed new section 25C of the Bill provides that the reporting obligations in proposed new subpart 3E only apply to resident passive income. To provide certainty, officials recommend that proposed section 25E(1)(c) is amended to refer to a “taxable dividend”.

Recommendation

That the officials’ comments be noted.

RWT FILING DEADLINE (TRANSITIONAL PROVISION)

Clauses 239 and 241

Issue: Advancing the filing deadline from 31 May to 15 May for RWT and NRWT

Submission

(ANZ, New Zealand Bankers Association)

The submitters do not support bringing forward the deadline for filing annual reconciliations for RWT and NRWT from 31 May to 15 May in May 2019 and May 2020 (from 1 April 2020, the information will be provided monthly). The provision of this information is currently a manual process, and will be occurring at the same time as significant systems changes are made to meet the new monthly information reporting requirements. Advancing the filing deadlines creates a risk of errors arising in the annual filings as the same resource involved in completing the annual reconciliation within a compressed timeframe will also be involved in the systems and process development.

Comment

While officials understand the submitters’ concerns, bringing forward the due date will enable Inland Revenue to pre-populate interest and therefore to issue PTSs and refunds to taxpayers sooner.

Pre-population is also considered important for the years ended 31 March 2019 and 2020 as it will allow the recipients of interest to confirm that the interest income being pre-populated is the same as the interest income being shown on their end of year tax certificates. This will allow recipients the opportunity to gain confidence in the pre-population process or raise any concerns before the removal of the requirement for interest payers to provide end of year tax certificates takes effect.

Recommendation

That the submission be declined.

Issue: Transitional provision

Submission

(Matter raised by officials)

Clause 239 should be amended to ensure that the 15 May reporting date does not apply to payers of royalties.

Comment

Clause 239 provides that NRWT withholding certificates and annual reconciliations must be provided to the Commissioner by 15 May instead of 31 May for the 2019 and 2020 tax years (the “transitional provision”). The rationale behind this is to ensure that payers of investment income do not have two reporting dates as the RWT due date is being moved forward to 15 May to facilitate pre-population tax returns prior to monthly reporting applying. The RWT and NRWT information comes from the same system so it is easier to report it at the same time. The transitional provision currently applies to royalties, however payers of royalties will not need to provide information monthly from 1 April 2020, the current requirement of yearly reporting on 31 May will remain. The effect of this transitional provision on royalties is to therefore change the reporting date for the 2019 and 2020 tax years to 15 May, which will then revert back to 31 May from 1 April 2020. This was not intended.

Recommendation

That the submission be accepted.

Issue: Application date of transitional provisions

Submission

(Matter raised by officials)

Clauses 239 and 241 should apply for the 2018–19 and 2019–20 tax years, as opposed to income years.

Comment

Clauses 239 and 241 require payers of investment income to provide year-end information relating to NRWT and RWT by 15 May instead of 31 May. It would be inappropriate for this to apply from an income year, given the reporting of RWT/NRWT does not operate on an income year basis. It should instead apply for the 2018–19 and 2019–20 tax years.

Recommendation

That the submission be accepted.

RWT-EXEMPT STATUS

Issue: Provision of information relating to RWT exempt payers

Clause 212

Submission

(Corporate Taxpayers Group, New Zealand Bankers Association, Olivershaw)

The group does not support the proposal to require payers to provide taxpayer specific information to Inland Revenue in relation to payments made to persons with RWT-exempt status by 20 April following the end of the tax year.

As currently drafted, this will require reporting on investment income unless the payment was not in furtherance of a taxable activity. At its most extreme, it would require any individual with a rental property who is paying interest to a bank to report that interest to Inland Revenue.

In order to keep within the purpose of the investment income proposals – namely to pre-populate individuals’ tax returns and ensure more accurate social policy calculations, this reporting should be limited to investment income payments made to RWT exempt individuals.

There are a number of instances where the group believes reporting is unwarranted or would create undue compliance costs. New Zealand Bankers Association encourages officials to consider these scenarios:

  • interest paid to financial institutions;
  • interest paid between related companies that are not wholly-owned;
  • hire purchase and finance leases;
  • interest on SME overdrawn current accounts;
  • overdue trade credit accounts; and
  • dividends exempt from tax (between wholly-owned companies).

New Zealand Bankers Association queries the need to report detailed investment income information regarding interest paid to holders of certificates of exemption. By creating an electronic database of taxpayers with RWT-exempt status, Inland Revenue should have increased certainty of accuracy of tax positions without the need to impose additional compliance burdens on banks to report detailed information which is unlikely to provide any benefit to Inland Revenue. (New Zealand Bankers Association)

This proposal should be removed from the Bill or a number of exemptions made to it. Holders of certificates of exemption from withholding tax are generally banks, large corporates and high net wealth individuals who do not have 31 March balance dates, and therefore the reporting of this information is of no relevance. (Olivershaw)

Comment

Officials agree with the submitters that the proposal to require payers to provide taxpayer-specific information to Inland Revenue in relation to payments made to persons with RWT-exempt status (proposed new section 25M), should be removed from the Bill. This proposal would require a significant number of exemptions in order to be workable, and even then, the value of this information is likely to be limited given that Inland Revenue will be establishing an electronic database of taxpayers with RWT-exempt status. There are some people with RWT exempt status that it would be useful for Inland Revenue to receive information about, however, it would be difficult for payers to single out these people. Officials therefore recommend that the Commissioner obtain this information as needed by requesting it from the payer.

Recommendation

That the submission be accepted.

Issue: RWT-exempt status

Clauses 163, 220 and 224

Submission

(ANZ, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, New Zealand Bankers Association, KPMG)

The submitters are supportive of the proposal to create an electronic database of current certificates of exemption. (ANZ, Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, New Zealand Bankers Association, KPMG)

KPMG also supports the proposed requirement for investors who have ceased to be RWT-exempt to inform their investment provider. (KPMG)

Recipients of investment income exempt from tax under another Act should be granted an exemption automatically as Inland Revenue should already have sufficient details available – for example, through the Charities Register. (EY)

Comment

Officials welcome the support.

Officials disagree with EY’s suggestion that exemptions should be automatically granted to recipients of investment income exempt from tax under another Act. It will not be possible to confer exemptions automatically on entities exempt under other Acts, as many of these are not subject to a regulatory body, such as the Charities Services – Department of Internal Affairs, from which information on those entitled to an exemption can be obtained.

Officials note that charities are exempt from tax under the Income Tax Act 2007, not another Act. Officials will consider granting charities RWT-exempt status as a matter of course, and will proactively contact persons exempt under other Acts where possible.

Recommendation

That the submissions be noted, and one declined.

Issue: The information published on the electronic register of RWT-exempt status should be limited

Clause 220

Submission

(Russell McVeagh)

The information that the Commissioner must publish on the electronic register of persons with RWT-exempt status should be limited to the person’s IRD number and the start date and end date of their RWT exempt-status. It would be inappropriate for the Commissioner to publish the name of a person alongside their IRD number on a publicly searchable register as this would allow anybody to search the register and access the tax file number of a person.

Comment

Officials agree with the submitter. The publication of the person’s IRD number and start and end date of their RWT exempt-status will be sufficient to allow payers to verify whether a person has RWT-exempt status whilst also adequately protecting their privacy. This is also consistent with what is currently published in the New Zealand Gazette.

Recommendation

That the submission be accepted.

Issue: The methods for determining RWT-exempt status

Clause 163

Submission

(Russell McVeagh)

In addition to the proposed new method – searching the electronic register – the two existing methods for allowing “Person A” to determine whether “Person B” has RWT exempt status should remain, namely that:

  • person A has taken reasonable steps to confirm that person B is a person listed in section 32E(2)(a) to (h) of the Tax Administration Act 1994;
  • except in relation to a person listed in section 32E(2)(k) or (l) or to whom a certificate has been provided under section 32I, person A has been given person B’s tax file number and has been notified that person B has RWT-exempt status.

Removing these methods does not simplify the process in all situations and will increase compliance costs in some situations.

Comment

Officials agree with the submitter that the two existing methods should remain. This would reduce compliance costs in some instances – for example, a person paying interest on their mortgage would not need to check the register to determine that their bank was exempt from RWT. The fact that the person knew they were paying to a bank would be sufficient to constitute “reasonable steps” to determine that the bank was a person listed in section 32E(2)(a) to (h).

Recommendation

That the submission be accepted.

Issue: Tertiary education subsidiaries and RWT-exempt status

Clause 218

Submission

(Matter raised by officials)

Clause 218 of the Bill should further amend section 32E of the Tax Administration Act 1994 to enable tertiary education subsidiaries to qualify for RWT-exempt status. The amendment should apply from 1 July 2008.

Comment

Tertiary education institutions (TEI) and subsidiaries that applied their income for the purposes of the TEI were generally income tax exempt as charities until 1 July 2008, when a requirement was introduced for charities to be registered with the Charities Commission[7] in order to be tax exempt. Because the TEIs would have been subject to multiple reporting and monitoring requirements, a specific exemption was enacted for them in section CW 55BA, but this did not cover their subsidiaries.

To restore the position that existed for tertiary education subsidiaries (TES) before the original enactment of section CW 55BA, the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act widened the exemption to include TESs.

There appears to be an unintended gap in the legislation as there is currently a specific provision (section 32E(2)(kc) of the Tax Administration Act 1994) that allows a TEI to apply for RWT-exempt status, but no provision for TESs. This means that unless a TES is able to qualify on other grounds (such as turnover exceeding $2 million), they will be unable to qualify for RWT-exempt status. It was not intended that an entity exempt from tax would be unable to apply for an exemption from withholding tax.

The fiscal impact of this is in timing only as currently TESs are subject to withholding tax but exempt from tax generally.

Recommendation

That the submission be accepted.

Issue: RWT-exempt status – electronic register

Clause 220

Submission

(Matter raised by officials)

Clause 220 should be amended to require the Commissioner to publish the IRD numbers of persons granted RWT-exempt status on an electronic register.

Comment

Clause 220 currently only requires the Commissioner to add the details of persons granted RWT-exempt status to the electronic register. The intention was that this information would be published. This is consistent with clause 224 which requires the Commissioner to publish on an electronic register a list of all persons whose RWT-exempt status has been revoked.

Recommendation

That the submission be accepted.

FINANCIAL ARRANGEMENTS

Issue: Interaction of financial arrangement rules

Submission

(Chartered Accountants Australia and New Zealand)

Non-cash basis persons return financial arrangement income on an accruals basis, whereas in the future, tax records will be pre-populated on a cash basis. There needs to be some mechanism to alert taxpayers that the financial arrangement rules may apply so that taxpayers can calculate and return investment income on an accruals basis when that applies.

Comment

Officials agree with the submitter’s comment and will consider including an alert mechanism on myIR as part of the online form design, as well as guidance on the Inland Revenue website.

Recommendation

That the officials’ comments be noted.

Issue: Accruals-based tax system and cash-based reporting

Submission

(EY)

An accruals-based tax system does not sit well with cash-based reporting. Reporting income on a cash basis will lead to inaccuracies. For example, dividends are not always received in cash. Also the financial arrangement rules will be particularly problematic as cash basis persons will be required to complete a base price adjustment on the disposal or maturity of investments. Many individuals are required to return financial arrangement income on an accruals basis, in which case the information provided to Inland Revenue by their financial institution may bear almost no relationship with their actual taxable income. Unless the Government plans to significantly amend the tax treatment of investment income, these proposals will not work for many taxpayers.

Comment

The rules have been designed to work for the majority of taxpayers. There will always be taxpayers for whom the rules do not provide the final taxable income position – for example, taxpayers required to return income on an accruals basis under the financial arrangement rules. Work is currently under way to reduce the number of taxpayers that have to return interest under the financial arrangement rules. This will generally leave a minority of potentially more sophisticated taxpayers subject to the accrual method of returning interest income. Officials also note that accruals basis taxpayers already receive end of year tax certificates from banks on a cash basis and are required to calculate their tax position on an accruals basis under current law and do not consider that the changes make a significant difference to this position.

Cash basis taxpayers will only be required to complete a base price adjustment on a few specific types of investments. Pre-populating income for these taxpayers will be accurate for all years except for the year of maturity or disposal where a base price adjustment may be required.

Officials note that non-cash dividends will have to be reported and will be pre-populated. While reporting for non-cash dividends is more likely to be done manually rather than via computer systems, it will only lead to inaccuracies where an error is made.

Recommendation

That the submission be declined.

Issue: Information on financial arrangements

Clause 212

Submission

(Corporate Taxpayers Group)

The group does not support requiring a person with RWT-exempt status to provide detailed information in relation to the acquisition or disposal of financial arrangements with their return of income for the year.

The group understands that this is currently required under the Tax Administration Act 1994 and the proposal simply moves this obligation to a new section, however, there is widespread non-compliance with this section and Corporate Taxpayers Group query the need for it. If this provision is required, Inland Revenue should demonstrate how it uses this information and what the benefit of this information is.

Comment

Officials agree with the submitter. This provision (section 53 of the Tax Administration Act 1994, moved to proposed new section 25O in clause 212 of the Bill), is not being used and therefore should be removed from the Bill.

Recommendation

That the submission be accepted.

ELECTRONIC FILING

Issue: Encouraging electronic filing

Clause 212

Submission

(Chartered Accountants Australia and New Zealand)

Chartered Accountants Australia and New Zealand supports the requirement to file investment income information electronically.

Recommendation

That the submitter’s support be noted.

Issue: Non-electronic filing penalty

Clause 269

Submission

(KPMG)

The focus should be on helping taxpayers to comply with the new electronic filing requirements, rather than necessarily penalising them. It is critical for small payers that a simple electronic filing option is made available (such as a web-based portal).

Comment

Paper filing is slower, more expensive in terms of compliance costs for payers of investment income and administrative costs for Inland Revenue, and more prone to errors. Officials therefore recommend that the proposed non-electronic filing penalty is retained, and note that there is an exemption from electronic filing available for taxpayers unable to access digital services and that an online form will be available for filing which may be more suitable for small payers of investment income.

In the early stages of the new requirements, it is intended that the Commissioner will adopt a compliance improvement focus and be in touch with taxpayers to raise awareness and assist compliance. In addition, officials recommend that the Bill should provide the Commissioner with flexibility around whether to impose non-electronic filing penalties during the early stages of the new investment income information regime.

Recommendation

That the submission be accepted, subject to officials’ comments.

APPROVED ISSUER LEVY

Clause 212

Submission

(ANZ, New Zealand Bankers Association)

The Bill should clarify that the approved issuer levy (AIL) information requirements for investors does not extend beyond the initial investor (such as nominees).

While nominees inform ANZ of the amount of AIL to be paid in respect of the investors they hold on behalf of, ANZ may not have access to the detail required in the Bill of who they hold the debt on behalf of. As such, it would be prohibitive, and in some cases potentially impossible due to foreign privacy laws, to trace through nominees to obtain and provide details of ultimate investors to the Inland Revenue.

Comment

The requirements on payers of AIL are contained in proposed new sections 25E and 25F (clause 212 of the Bill). Officials agree with the submitter that it may not be possible to obtain information on investors who have invested via an agent or nominee. Officials recommend that the Bill be amended to provide that only information on the initial investor is required.

Recommendation

That the submission be accepted.

JOINT ACCOUNTS

Issue: Information on joint account holders

Clause 212

Submission

(ANZ, New Zealand Bankers Association, Financial Services Council)

Further clarification is required on who is considered to be joint account holders, particularly in the case of partnerships, trusts and companies. For example, it is uncertain what will constitute a joint holder in the case of a partnership, a trust or a company having an account with a bank (that is, will it be necessary to identify all partners in the partnership, all trustees or beneficiaries in respect of a trust and all shareholders in respect of a company). Identifying the “controlling persons” of such entities for Automatic Exchange of Information purposes has caused (and continues to cause) significant issues for both financial institutions and customers. A light touch should be adopted for the purposes of the Bill. (ANZ, New Zealand Bankers Association)

The Financial Services Council is concerned about the number of records its members will need to capture and store on joint owners, for example, multiple trustees, and requests these data requirements be limited to the extent possible. (Financial Services Council)

Comment

Proposed new section 25D in clause 212 sets out the information that payers must provide in relation to joint accounts. Officials recommend that the Bill is amended to provide that information on the beneficiaries of a trust, shareholders of a company, and partners in a partnership that are required to file a joint return (a “formal partnership”), is not required. The rationale behind obtaining more frequent information is to enable pre-population of tax returns and to allow Inland Revenue to adjust tax and social policy payments. Income earned by a trust/company is generally not income to the beneficiaries/shareholders until distributed, which may not occur until sometime later. It would therefore be contrary to this rationale to obtain the information at the point where income was paid to the trust or company.

For look-through companies (LTCs), and partnerships that are required to file a partnership return, there is little benefit in receiving this information to enable pre-population into the LTC/partnership tax return, given the shareholders/partners will then need to file their own returns and include the income relative to their respective shares.

Information on the partners in a partnership will be required where it is held by the payer, however not for formal partnerships as mentioned above.

Recommendation

That the submission be accepted.

Issue: Joint investments – splitting investment income

Submission

(Chartered Accountants Australia and New Zealand, Financial Services Council)

Joint owner account information should not be automatically assessed on the assumption of an equal split as this will often be incorrect. Joint owners should have the option of determining how the income is apportioned, however if the proposal to pre-populate the income on an equal basis proceeds, the Commissioner should be required to alert the taxpayer that jointly owned investment income has been included in their tax record based on the assumption that it has been derived in equal shares. (Chartered Accountants Australia and New Zealand)

The Bill should be amended to provide clarity in relation to joint owners, including the basis of splitting by the Commissioner. (Financial Services Council)

Inland Revenue should publish guidance on how it will split investment income between joint account holders. (Financial Services Council, AMP)

Comment

Officials recognise that pre-populating income on the basis of equal shares may not be correct in all instances. However, by not pre-populating the information there is a risk that the income will not be returned. Whilst tax would have been withheld on that income, not including it on the taxpayers’ tax information may affect the tax rate applicable to the taxpayers’ other sources of income.

Officials recommend that this income is pre-populated on the assumption that the income was earned in equal shares, however agree with the submitters that taxpayers are notified of this and given the option of adjusting their income shares. This process can be dealt with administratively and does not require an amendment to the proposed provisions in the Bill – the Tax Information Bulletin can explain that Inland Revenue will allocate joint account income to the owners on a proportionate basis. Where that allocation is incorrect the owners will have the opportunity to adjust this to reflect their true income share. Inland Revenue will notify taxpayers of this through myIR.

Recommendation

That the submission be accepted in part.

PROVISION OF INVESTMENT INCOME INFORMATION BY MĀORI AUTHORITIES

Clause 212

Submission

(EY)

When providing investment income information, a Māori authority should:

  • not be required to seek, obtain and check additional information from or relating to beneficiaries;
  • be able to provide information in a format which can be extracted easily from existing systems; and
  • be allowed to provide information regarding identity once only, with further returns required only when updated details are available.

In addition, the Commissioner of Inland Revenue should confirm that she will not seek to convict a Māori authority of any offence if it is unable to provide the required information.

Several larger Māori authorities have more than 10,000 beneficiaries generally in receipt of small amounts. Contact details are not always available for the beneficiaries. Some Māori authorities will withhold tax and make a payment to the latest bank account on record but find that money is returned because the account is closed and they are unable to contact the beneficiary. Unlike other investors, Māori authority beneficiaries do not choose to invest in a particular institution. Instead, fragmented ownership interests over the last century mean that many beneficiaries have died, with their personal representatives unaware of any Māori authority entitlements.

Comment

Officials largely agree with the submitter that the information requirements on Māori authorities in proposed new section 25I (clause 212) should be revised, and recommend that:

  • In relation to information a Māori authority receives from its customers, for example, name, contact details, date of birth, IRD number and tax rate, they are only expected to pass on the information provided to them. Officials recommend that this is clarified in the Tax Information Bulletin.
  • Date of birth information received by the Māori authority prior to 1 April 2018 that has not been digitised does not have to be provided to Inland Revenue.
  • For smaller Māori authorities, Inland Revenue will look into pre-populating online forms with identity information. Large Māori authorities will be required to provide this information with each report as they will be providing this information in specialised files.

Recommendation

That the submission be accepted, subject to officials’ comments.

MEASURES TO IDENTIFY TAXPAYERS

Issue: Measures to encourage the provision of IRD numbers

Clauses 81, 85, 180(2) and 215

Submission

(Chartered Accountants Australia and New Zealand, Corporate Taxpayers Group, EY, Financial Services Council, KPMG)

The submitters support the increase of the non-declaration rate from 33% to 45% for interest income (KPMG, Corporate Taxpayers Group), and the requirement that investors opening new investments in PIEs provide their IRD numbers within 6 weeks in order to remain a member of the PIE. (Corporate Taxpayers Group, EY, Financial Services Council)

Chartered Accountants Australia and New Zealand also support both of the above measures, but not for existing account holders.

EY submits that the proposal to increase the non-declaration rate for interest income from 33% to 45% should not proceed. A 33% non-declaration rate will ensure that income tax is paid in full except in rare cases where individuals’ social policy obligations leave them with a higher marginal tax rate. Forcing existing investment income account providers to add a further withholding rate is likely to add compliance costs with little impact on tax revenue. (EY)

Specific provision should be made in relation to the tax file number requirement for non-residents that subsequently become resident and the notification of such to the PIE. (Financial Services Council)

Comment

Officials welcome the support.

Officials disagree with submitters’ suggestions that the increased non-declaration rate not apply to existing account holders or not apply at all. The increased non-declaration rate is intended to incentivise taxpayers to provide their IRD numbers to their investment income provider. Currently 20 per cent of interest certificates received by Inland Revenue do not contain the recipient’s IRD number, if the increased non-declaration rate proposals only applied to new accounts, these taxpayers would have no incentive to provide their IRD number to their investment income payer.

The non-declaration rate needs to be higher than 33% in order to incentivise taxpayers on a 33% marginal rate, and those with social policy entitlements/obligations who may have a higher effective tax rate, to provide their IRD number to their investment provider. In 2015, the average annual household income of taxpayers receiving Working for Families was $90,948 and the median was $75,920. Taxpayers on the 17.5% marginal tax rate would have an effective tax rate above 33% once Working for Families abatement is considered.

A 45% non-declaration rate is consistent with the non-declaration rate applicable to salary and wage income.
Inland Revenue intends to work with the banks to reduce the number of taxpayers subject to the non-declaration rate prior to its increase to 45%.

Officials agree with Financial Services Council’s suggestion that provision be made for non-resident PIE investors that subsequently become residents. Officials recommend that these taxpayers are given 6 weeks from notifying their PIE that they have become resident to obtain an IRD number in order to remain a member of the PIE.

Recommendation

That the submission be accepted in part, subject to officials’ comments.

Issue: Sharing IRD number data

Submission

(ANZ, New Zealand Bankers Association)

It would be useful to share IRD number information between IRD and payers of investment income. It is highly likely that the IRD will have IRD number data which banks do not have. Sharing such information in advance of 1 April 2020 will minimise the number of taxpayers impacted by the increase in the non-declaration rate.

Comment

Officials agree with the submitter and propose that the matter be subject to consultation. It could then be included in a future tax Bill. As an interim measure, Inland Revenue will consider ways to work with banks to share IRD numbers on an administrative basis.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Date of birth

Clauses 212, 284 and schedule 2

Submission

(EY)

Investment income information should exclude a customer’s date of birth. The customer’s IRD number is already a unique identifier; therefore date of birth information will only be useful to identify taxpayers who have not provided their IRD number. The marginal identification benefits of providing this is likely to be exceeded by the compliance costs.

Comment

In addition to taxpayers who have not provided their IRD number, date of birth information is useful in confirming a taxpayer’s identity where two or more taxpayers have the same name or where an incorrect IRD number has been provided. Obtaining date of birth information would also enable Inland Revenue to associate information received from other government agencies with the correct taxpayer, and vice versa.

Recommendation

That the submission be declined

MISCELLANEOUS

Issue: Interest and dividends between associated parties in the small and medium enterprise (SME) sector

Submission

(Olivershaw, Belmont Partners)

Interest and dividends paid between associated parties in the SME sector should be exempt from RWT and instead taxed under the provisional tax rules.

This treatment would be consistent with how shareholder salaries are taxed and recognises that interest and dividends paid by SMEs can be close substitutes for salaries. It would result in material compliance cost savings as the accountant could calculate the tax payable as part of completing the end of year tax return, rather than having to withhold RWT and report on it during the year. Further, the tax would be paid earlier under provisional tax than it currently is under the RWT rules as interest in a closely-held company is generally paid at the end of the year. (Olivershaw)

The Bill is silent on how year-end interest calculations are treated – for example, interest charged on overdrawn shareholders’ current accounts, where the interest is calculated and paid when the tax return is filed, which is after the end of the tax year. This gives rise to the following issues:

  • In which year will the interest be taxable: Under current law the interest is returned in the year it relates to, but RWT is not withheld until the following year when the interest is paid. Given Inland Revenue will be pre-populating tax returns, this may indicate that Inland Revenue is expecting the interest to be returned in the year it was paid.
  • RWT credits: RWT credits can only be claimed once the interest has been paid, despite the interest relating to, and being returned in, the prior year.

Belmont Partners submits that year-end interest accruals should be exempt from RWT, or deemed to arise in the subsequent year, and that RWT credits should be able to be claimed in the year in which the interest income is returned.

Inland Revenue guidelines in regards to the appropriate method for calculating interest on overdrawn shareholders’ current accounts and non-interest advances to associated persons would be welcomed as calculation practices currently differ. Further, when the current account becomes overdrawn part way through the year, it is unclear whether the gross interest or net interest income is to be used for RWT reporting purposes. (Belmont Partners)

Comment

Officials acknowledge the issues in this area; however, it is out of scope of the proposals in the Bill which focuses on the administration of investment income information, rather than what income is or is not subject to RWT. Further, a proposal of this magnitude would need to be consulted on before it was proceeded with. Officials will recommend that the Government considers this issue for inclusion in the next tax policy work programme.

Inland Revenue guidelines outlining the appropriate calculation methods for interest on shareholders’ current accounts and non-interest advances to associated persons has not been published and is out of the scope of this Bill.

In relation to whether the net or gross interest amount should be used for reporting purposes, guidelines were published in March 1991, Tax Information Bulletin, Vol. 2 No. 7, page 8. This Tax Information Bulletin concluded that the RWT rules apply when interest is “paid” which requires the amount to be quantified and either paid, credited to, or otherwise dealt with in the interests of the shareholder – which generally occurs when the accounts are actually ratified. Therefore, in response to the submitter’s question, the net amount should be used for RWT reporting purposes.

Recommendation

That the officials’ comments be noted.

Issue: Responsibility for providing correct information

Submission

(Corporate Taxpayers Group, New Zealand Bankers Association, EY)

The Bill is silent as to who the onus of proof would be on to ensure the taxpayer specific information provided to Inland Revenue was correct, or whether any penalties would apply for failing to provide correct information. Financial institutions are reliant on their customers to provide accurate data (that is, their IRD number); therefore the onus should be on the customer. The financial institution should not be required to follow up with the customer if Inland Revenue’s system identifies that incorrect information has been provided. The responsibility for following up any discrepancies should lie with Inland Revenue.

Comment

The responsibility for following up discrepancies in information provided will be Inland Revenue’s.

The onus will be on customers to provide accurate identity information to their investment income payer – for example, name, contact details, date of birth, IRD number and tax rate. Payers of investment income are only expected to pass on to Inland Revenue the information their customers provide them. For information determined by the payer, for example income paid and tax withheld, the onus would be on the payer to get this right and the existing penalties provisions in the Tax Administration Act 1994 would apply.

Officials recommend that this is clarified in a Tax Information Bulletin.

Recommendation

That the submission be accepted, subject to officials’ comments.

Issue: Method of reporting information

Submission

(Corporate Taxpayers Group)

Inland Revenue should be flexible in regards to the methods allowed for reporting information. For example, smaller businesses may use spreadsheets to record information, whereas larger businesses use registry systems.

There should be an electronic gateway for businesses to provide information to Inland Revenue, with the additional option of an online form for payers who would not be suited to using the electronic gateway.

Comment

Officials agree with the submitter. The Making Tax Simpler: Investment income information discussion document released in July 2016 proposed both the electronic gateway and the online form as methods for providing information to Inland Revenue. Inland Revenue will be making these two options available. This can be dealt with administratively without the need for legislation.

Recommendation

That the officials’ comments be noted.

Issue: Provision of investment income information by financial intermediaries

Clause 212

Submission

(EY, Financial Services Council, KPMG)

The Bill should be amended to clarify the requirements of the investment income information proposals for intermediaries such as custodians[8] and wrap account service[9] providers. (EY, Financial Services Council, KPMG)

Further consultation with financial intermediaries should occur before any recommendations on this are made. (EY)

Comment

Officials agree with the submitters. However, this matter will require public consultation so is therefore unable to be included in this Bill. Officials will recommend that the Government considers this issue for inclusion in the next tax policy work programme.

Recommendation

That the officials’ comments be noted.

DRAFTING

Issue: Notified investor rates

Schedule 2

Submission

(Russell McVeagh)

The reference to “prescribed investor rate” and “the tax rate of the investor” in proposed schedule 6, table 1 of the Tax Administration Act 1994 (schedule 2 of the Bill) rows 11 and 12, should be replaced with “notified investor rate” and “the tax rate of the investor for the period as notified to the payer”.

Comment

Officials agree with the submitter. Payers of investment income will only hold information on the tax rate or PIR that an investor has declared to them. While this may be the same as the investor’s tax rate or PIR most of the time, it may be different – for example, where the investor misunderstood the rules and gave the PIE an incorrect rate. Payers of investment income cannot be expected to determine the correct withholding rate or PIR for their investors, but rather to pass on to Inland Revenue the rate provided to them by the investor.

Recommendation

That the submission be accepted.

Issue: Evidential requirements for tax credits

Submission

(Matter raised by officials)

Section 78D of the Tax Administration Act 1994 should be amended to only require evidence of a tax credit from non-declared taxpayers.

Comment

Section 78D requires a taxpayer who has a tax credit to provide the Commissioner with a shareholder dividend statement, RWT withholding certificate, or Māori authority distribution statement, depending on the tax credit being claimed. This is no longer appropriate for declared taxpayers as Inland Revenue will be receiving information from payers of investment income on the amount of income a taxpayer has earned and the tax that has been withheld from that income, and will therefore know the amount of credit the taxpayer is entitled to.

Recommendation

That the submission be accepted.

Issue: Terms not defined

Clauses 161, 212 and schedule 2

Submission

(Russell McVeagh, EY)

The terms “investment provider” and “domestic debt” should be defined in legislation (Russell McVeagh).

The term “contact details” used in proposed schedule 6 should be defined (EY).

Comment

Proposed new section RE 27(4) of the Income Tax Act 2007 (clause 161(6)) requires a person who has RWT-exempt status to notify their “investment provider” of their status and a change in their status.

Proposed new section 25E(1)(b) of the Tax Administration Act 1994 refers to a person who chooses to pay approved issuer levy in relation to domestic debt.

Proposed new schedule 6 requires payers to provide Inland Revenue with their contact details, as well as the contact details of their investors.

These three terms should be defined in order to add clarity to the legislation.

Recommendation

That the submission be accepted.

Issue: Incorrect cross-reference

Clause 180

Submission

(Matter raised by officials)

Clause 180(2)(a) should be amended to refer to table 2 of schedule 1, part D, clause 3 of the Income Tax Act 2007, instead of table 1.

Recommendation

That the submission be accepted.

Issue: Information on dividends

Clause 212

Submission

(Matter raised by officials)

Proposed new section 25G in clause 212 should be amended so that information in rows 12 and 13 of schedule 6, table 1 is not required in relation to a dividend payment.

Comment

Rows 12 and 13 of schedule 6, table 1, refer to the notified investor rate of the investor and whether or not the PIE fund is a superannuation fund or a retirement savings scheme. This information relates to PIEs and therefore should not be required to be provided by companies paying dividends.

Recommendation

That the submission be accepted.

 

7 Now Charities Services – Department of Internal Affairs.

8 A custodian holds assets on behalf of clients in the name of the custodian and will only act on proper instructions from their client (or a party authorised by their client). The use of a custodian achieves a segregation of duties between the role of the client’s investment manager (and brokers and other market players) and the legal ownership of the client’s assets. The custodian will also process transactions, provide settlement of trades, provide consolidated reporting of holdings and provide monitoring of payments services associated with the assets held.

9 A wrap account allows investors wishing to simplify their investments and their administration to consolidate all of their investments in one place. Investors are able to access various investments through a single account. A single consolidated tax report is also received at the end of each year, providing potential savings on accounting fees.