Inland Revenue (IRD) is now full swing into the implementation of its business transformation programme, which aims to improve New Zealand’s tax system to meet current and future needs.
The latest publication in the Making Tax Simpler series centres on ways IRD can leverage technology and other changes to the tax system to make it more straightforward for the majority of individuals to comply with their tax obligations.
Income tax is currently collected from individual taxpayers by two main methods:
1. Some payers of income withhold tax from payments made to individuals, and forward the tax directly to IRD, such as employment taxes collected through the PAYE system and bank interest taxed through the “Resident Withholding Tax’ (RWT) system.
2. Under the self-assessment system, individual taxpayers report all of their income to IRD on their tax return and it is taxed accordingly.
The draft simplification proposal aims to shift the focus onto the first withholding tax method, and improve the current collection methods. The changes are broadly broken down into what happens during the tax year, and what happens at year end.
During the year
Under the current withholding tax system, it can be difficult for IRD to collect the correct amount of tax from an individual. The nature of the system means that mistakes can be made in selecting PAYE codes, or unexpected changes in income can lead to refunds or tax to pay at the end of the year. For example, when an individual has two jobs, and the second job puts them partially into a higher tax bracket, they may be taxed at 33 percent on all of that income, causing them to be overtaxed. A tax return is then required to refund the additional tax.
Under the new system, IRD will gather better quality information, and suggest changes in real-time, to more accurately tax an individual at the time income is derived.
After the end of the tax year
At the end of a tax year, individuals are currently required by law to consider their income tax position and determine whether they are required to file a tax return or request a personal tax summary.
IRD considers this is onerous and complex for many individuals with straightforward tax affairs, and many taxpayers are unaware that they are responsible for ensuring they have paid the correct amount of tax for the year. IRD propose two options to improve this.
At the moment, IRD automatically issue a personal tax summary to a number of individuals, e.g. those who have used a special tax code or received working for families’ tax credit. The individual is required to verify and correct the information, and any tax payable / due is calculated. It is hoped that the improvements made to the withholding tax system ‘during the year’ mean that the tax that has been withheld (eg. employment income and bank interest) will be accurate and a tax return will not be needed.
Instead, IRD would contact the individual if there was a year-end tax liability or refund. Employment income, interest income, NZ sourced dividends, and Maori authority distributions would all be accounted for by the IRD in the individual’s tax calculation.
Individuals will still be responsible for providing additional information to IRD if they earned income without any withholding tax, such as self-employment or rental income. The information will be provided to IRD using their online system, and after the first year reporting a certain type of income, the system would automatically prompt individuals to add similar information.
Other changes include increasing the use of direct bank transfers for tax payments / refunds, and refunds may be automatically paid to the individual without needing to be requested. It will also be easier to claim a donation tax credit through the online system, without needing to file an IR526.
In an ideal tax system, an individual would always pay the correct amount of tax, nothing more and nothing less. The ability for IRD to help people get their tax position correct is dependent on them receiving quality information in a timely manner rather than receiving it when it is too late to make an immediate correction. Through a more regular and timely provision of information to IRD, they will be better placed to ensure a higher number of individuals have paid the correct amount of tax by the end of the year.
Some may have concerns about the increased information gathering by IRD. It will be a case of balancing the need for privacy against the need for efficiency.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.