Dinesh Naik –
The release of the tax administration and PAYE and GST consultation documents is an important next step. It provides details of the government’s business transformation strategy for Inland Revenue Department (IRD).
The March consultation documents were the entrées. We are set for a series of main courses over the next 12 to 18 months.
Getting the tax administration framework right is critical. Often, the tax administration framework tends to be forgotten. However, this is key to establishing the rights and obligations of the IRD, taxpayers and various intermediaries.
The proposals for the role of the Commissioner, IRD secrecy and information collection powers, and the return obligations on taxpayers therefore warrant close attention.
The proposal to allow IRD to fill minor legislative gaps is worth a second look. Allowing the Department to achieve the ‘right result’ is sensible but providing flexibility has difficulties. It needs to be balanced against the potential for corruption, inconsistency of approach, and usurping Parliament’s role in making the law.
Our initial view is that the proposed safeguards appear to achieve that balance.
Ironically, the proposals align the position with what many think Sir Ivor Richardson sought to achieve when the Commissioner’s care and management power was first introduced.
How often in sporting commentary do you hear, “I don’t mind if the referee is wrong as long as he is consistent?”
This is implicit in the Commissioner’s obligation to maintain the integrity of the tax system. However, we think a requirement for the Commissioner to act as a “model litigant” throughout the exercise of her powers would be useful. This would prevent, for example, Inland Revenue arguing, as it has done, that the date of acquisition of land is different depending on whether a gain or loss is made. It would provide taxpayers with some certainty of interpretation.
Secrecy of taxpayer information is another area where the IRD could do more. The proposals will allow it expressly to go further than it currently does. Where this affects information in a broad sense, when individual taxpayers are not identified, this should simplify information and access to it by stakeholders.
However, care needs to be taken when specific information is exchanged. For example, the PAYE proposals will exchange information confirming an employee’s details. Although this information is required for an employer to comply with withholding and other obligations, it is also personal information that may not have been disclosed to the employer. The boundary for disclosure needs careful thought.
More tax returns
The proposals also signal a return to filing for individuals, in the form of prepopulated tax returns, thereby coming full circle on the non-filing experiment of the 1990s. Importantly, taxpayers will need to complete or confirm that the return is correct, to self-assess. Failure to do so will result in penalties.
The PAYE and GST proposals were flagged earlier in the year. The latest consultation document outlines how the rules for real time information could work in practice.
This includes IRD remotely confirming employees’ details (such as IRD numbers, tax codes, and KiwiSaver, student loan and child support status) to employers when an employee is hired. This is so the employee is correctly set up to reduce the risk of errors and the need for amendments.
This is supported but needs to be balanced with the secrecy and integrity of taxpayer information.
Businesses should pay particular attention to the proposals. As we noted at the time of the Green Paper in March, there will be transition costs and risks for business. The consultation document asks whether the rules for calculating PAYE on extra pays, for example, should focus on greater simplicity or accuracy. There is a clear trade-off that employers and employees will need to work through.
SMEs currently operating without electronic systems and large businesses with bespoke systems, will need time to transition. The proposals make some allowance for this. Small employers need to be aware that their PAYE reporting obligations are likely to be brought forward under the proposals.
Unsurprisingly, the Government is also keen to look at aligning the payment of PAYE with the time when employees are paid. The consultation document suggests a number of improvements from such an approach, such as lower risk of PAYE default by employers. However, collecting PAYE on a pay day basis provides Government with a cash flow benefit at a cost to business. This trade-off, when further costs are being imposed on business, should not be ignored.
Dinesh Naik is Tax Partner at KPMG New Zealand, Sponsor of the ‘Best Accountant of the Year’ Category of the Indian Newslink Indian Business Awards 2015.