Chartered Accountants & Tax Specialist
General update by IBBZ Accounting on latest tax news, business growth and technology tips.
From the statistics they have collected, it shows that individual income tax and Goods and Services Tax (GST) have a large proportion in the tax revenue collected at the end of June 2014 which was 40% and 32% respectively. It means that business and individual income tax are the very important part of the NZ tax system. Therefore, in this article, we will focus mainly on proposed changes of business and individual income tax.
Some major problems have been identified in the current NZ taxation system.
Therefore, government has introduced these proposed changes to simplify the tax system making it work more efficiently and effectively for everyone using it.
Business taxation system
First problem when dealing with business tax system is PAYE
In the current PAYE system, many employers still submit returns to IRD using paper-based. Although electronic filling is available, it is identified as additional process for businesses and is not aligned to businesses ‘accounting or payroll processes. More problems also come from the process of PAYE system. The IRD does not have a system to verify the information at the time they collect, which results to inaccurate information is being accepted by IRD. Moreover, there is an inefficient use of available information, as IRD does not have a good system to keep track of all information collected.
There are some issues with the current PAYE rules. The first and major problem is that the rules have not been significantly reviewed since its introduction in 1957. The PAYE system had become more complex, as individual wage and salary earners do not have to file annual tax returns and PAYE is used to ensure that correct amount of tax is collected from this group. More complexity is added through the introduction of other rules with KiwiSaver and Superannuation Funds. Tax codes and current marginal rate are also important to work out the correct tax for wage and salary earners.
Thus, there is a need to review and improve the PAYE rules and its system to make it more simple, but still accurate to use. The objective is to remove complexity in the PAYE rules and system making it more user-friendly for employers.
Proposed changes will incorporate PAYE process to the business system by improving greater use of digital services. By doing this, they can improve the timeliness and accuracy of information received. Information technology or software can help to deliver information faster and more accurate and it also a great way to reduce any errors or duplications in the information. Taxpayers also only have to supply information to government once as government can supply it to all related departments. In order to achieve that, they want to integrate PAYE into existing business systems rather than just an additional process for businesses. Compliance cost will also be reduced for the benefit of taxpayers.
For the PAYE rules, there is a review of existing PAYE rules which focuses on:
They also review the rules and link between withholding taxes and PAYE. The scheduler payment rules were introduced to cover situations when there is no true employment relationship.
The current PAYE system is still complex for small and medium business. The use of digital PAYE calculator and online tools to fill PAYE returns are highly recommended. These processes needed to be improved to create a more streamline process and easy to use for both taxpayers and Inland Revenue. It is important to revise the PAYE rules, but not complicate it further.
There are three major issues behind the provisional tax systems. The first problem is the risk of estimate provisional tax. When people under-estimates their provisional tax, there will be a Use of Money Interest (UOMI) charged on the business. Thus, to prevent interest, business will try to estimate annual tax liabilities par-way through a year of assessment. This will take times and there is compliance cost associated with estimating process. Other problem is associated with cash flows. Terminal tax will bring cash flow difficulties for business and it has flow-on effects for Inland Revenue in its enforcement activities.
There are many options introduced to reduce the provisional tax problems for businesses. The calculation and payment of income tax could be done more ”on –account” as income is earned during the year, just like PAYE system for business. The idea is to prepare accounting profits with a few adjustments, so the result can be used to calculate provisional tax. The purpose of this is to simplify the calculation of provisional tax. Businesses can also use third parties account-software to work out their taxable income for provisional tax. Other way to improve provisional tax system is to review the standard uplift method and its threshold (safe harbour taxpayers).
Moreover, for the cash-flow problems, individual and business need to be prepared and put money aside to have sufficient funds to pay for terminal tax when it falls due. There is an investigation to introduce a concept called “tax bank”. This is tax account where money is used only to meet tax obligations as they arise.
We do not think that the “tax bank” is going to work. It is more likely to hold up capital while taxpayer can use it for other important think in their business.
Most of companies operating in New Zealand are small and medium in size. Compare with large business, these businesses bears a larger proportion of compliance cost. Large businesses often have a better understanding of tax, good financial system and business process. Therefore, making tax easier for small and medium business is a real priority for the authority.
The problem with small and medium business in New Zealand is that they do not have enough understanding of tax, good financial systems and business process, which will affect their ability to meet their tax obligations. For example, without a good accounting system, their reported profit is likely to be inaccurate. There might be errors leading to incorrect profit, such as: mistakenly report between business and personal income and expenses, deductions and classification of capital expenditure and depreciation rate. Lacking of taxation knowledge could lead to incorrectly report their tax codes, file wrong tax returns and under-over pay tax.
Accounting software has been strongly recommended, as it could help small and medium business to meet their obligations. By using accounting software, it is easier for business owners to follow and prevent them from making errors. In case errors have been made, these softwares make it easier to identify the error and fix it before filing to Inland Revenue. Filling return process is also easier and more interactive between Inland Revenue and taxpayer by using these softwares.
Penalties rules are expected to change as well. The new rule will focus more on the processes and systems of the customer, thus encouraging customers to remedy systems faults which give rise to tax shortfalls. Therefore, Government is working to simplify the tax rules, which the purpose to reduce compliance costs and make it easy to comply.
Improving software is one good way to help small and medium business. However, we think that it is not very helpful to improve taxpayers’ understanding of tax. Government need to simplify the tax systems and better explanation of tax system on their website or better education before taking money from their account because of these misunderstanding,.
As the population is aging, more saving is expected to be made. Thus, resident withholding tax (RWT) will become more popular in the future.
The problem with current RWT system is that Inland Revenue only receives information from financial institutions on an annual basis. Thus, the process is very slow and sometimes it is not accurate and hard to verify. The administration cost and compliance cost associated with this process are quite high. For the dividends prospective, the process is still slow and IRD could not receive information in time when dividends payments are made. For personal interest receive, taxpayers can choose the interest they want to be taxed at. This can create lots of biased outcome.
There are many reviews have been done on RWT system. Information relating to RWT should ideally be processed automatically as part of existing business systems rather than as part of a separate return. Business system should interact directly with Inland Revenue with up-front validation of information.
It is the right way to improve interaction and system between business and Inland Revenue in terms of RWT. The current system is highly dependent on financial institutions.
Overall the Government is heading the right direction, with the changing world around us, the tax system needs to be changed. Their main focus is going to be around data validation, where they can have some checks in place to ensure the data collection is correct. For example if you have entered incorrect IRD number of your employee, this will be alarmed at the point of entry. Or if you have chosen incorrect tax rate during opening your bank account, this will be alarmed at the point of entering your tax rate. It is all about collecting the right kind of data, and ensuring data can check itself and send alarms to the concerned authorities or people.