Revenue: no impact Recommendation Officials recommend option 2 as tax payments based on actual rather than forecast income, excluding shareholder salaries, will work for a large number of businesses where income accumulates over the year. This will reduce stress around year end payments and UOMI for taxpayers who use this method. Paying tax as agent for shareholder-employees Provisional tax gives rise to particular concerns for small businesses and their owners. The current rules apply separate obligations to a company and each of its shareholders. At its core what is happening is that a flow of income is being derived in a single economic entity and being partitioned out at the end of the year between the company and its shareholders, normally by way of shareholder salary. Each shareholder will typically be liable for provisional tax on that income. The current approach does not align with the principle that tax should be collected by the person who is able to do so most efficiently, and compliance costs minimised. Officials have considered a number of options to address these concerns, which are summarised below and outlined in more detail in appendix A-4. Options Analysis against the objectives 1. Retain the status quo Fairness and equity:  Compliance and administration:  Sustainability:  Revenue: no impact 2. Allow companies to pay tax as agent for shareholder-employees Fairness and equity:  Compliance and administration:  Sustainability:  Revenue: no impact 3. Require businesses to pay tax as agent for related parties Fairness and equity:  Compliance and administration:  Sustainability:  Revenue: no impact 4. Exclude those associated with small businesses from paying provisional tax entirely and pay at terminal tax date Fairness and equity:  Compliance and administration:  Sustainability:  Revenue: unquantified revenue cost due to deferral Recommendation Option 2 is recommended by officials as this enables businesses and associated individuals to evaluate whether the benefits from removing associated parties from the requirement to pay provisional tax outweighs any additional costs or complexity. This option is also supported by the stakeholders consulted.
3. Increase the safe harbour threshold to $70,000 and expansion of safe harbour from UOMI to Not met Higher threshold brings more sophisticated taxpayers into the safe harbour. These taxpayers should have sufficient ability to determine their tax position without safe harbour which creates unfairness to those who cannot. Partially met Reduces compliance costs for some taxpayers, and for taxpayers who have no real issues with provisional tax as their business processes include forecasting and budgeting. Partially met Provides more certainty on the application of UOMI for some, but makes little difference to those at the top end of the scale. This option would have a greater fiscal cost than option 2 which makes this less viable for government. 4. Increase to the safe harbour from UOMI to $60,000 with no extension to Not met Changes to the safe harbour to increase it to $60,000 without extending it to would not have a large effect on taxpayers because of the narrow group of taxpayers that would benefit. This provides an inequity to taxpayers because of the vehicle of choice they have made for predominately non-tax reasons (e.g. limited liability). Not met Increases administration for Inland Revenue in having to change systems for a very small group of taxpayers. Reduced compliance costs for the limited number of taxpayers who are affected, but may not outweigh the costs. Met Marginal revenue impact individuals individuals
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Status quo Not met The application of UOMI will continue to have a penal effect rather than a use of funds effect for those taxpayers who have unexpected income. The application of UOMI to taxpayers who use the standard method will continue to have an impact on fairness aspects. Not met Taxpayers will continue to experience uncertainty in the application of UOMI to them, creating compliance costs. Taxpayers who commit to paying a minimum amount of tax through the standard method will continue to view UOMI as a penalty. Not met Some taxpayers will continue to view provisional tax in a negative light with the current rules providing uncertainty as to the total tax liability including interest. No impact 2. Remove the application of UOMI for the first two provisional tax instalments for taxpayers who use the standard method Met Taxpayers who commit to making a minimum level of tax payments during a year based on the best information available on their performance should not be penalised by the application of UOMI where the actual liability is different. Increases the fairness to taxpayers of unexpected changes in income. Met Makes provisional tax simpler for the majority of provisional taxpayers who currently use the standard method to calculate their provisional tax. Reduces administration as Inland Revenue will have a better picture of provisional tax payments that will be payable for a year. Met Increases certainty for taxpayers in terms of their total liability to tax and UOMI for a year. This measure has a revenue cost of $7.5 million and a cash-flow cost of $334 million over four years. 3. Remove the application of UOMI to Not met Not met Met This measure has a prohibitive cash-flow and revenue cost.
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Status quo Met Shareholder-employees who receive salaries from companies, and which is not taxed at source, are liable to pay provisional tax, just as who receive other income not taxed at source are Not met The current system has compliance costs which are of significant concern to business and government. Partially met The fairness of the status quo approach supports sustainability, but the degree of concern around the compliance costs of provisional tax does not support sustainability. No impact 2. companies to pay tax as agent for Met Fairness will be maintained provided rules are implemented in such a way that tax paid on behalf of related parties is paid at the time that those related parties would have paid it themselves if these rules had not applied. Partially met This option allows shareholder-employees to be entirely removed from provisional tax. However, calculations of underlying tax liability are still required, to enable the correct amount of tax to be paid on their behalf. Some companies will also compliance costs in determining whether to opt into these rules or not. Met This option is both fair and reduces the compliance cost impact of provisional tax. The non-compulsory nature means it is unlikely to be opposed by business. No impact (provided this option is implemented in a way which ensures that no revenue leakage occurs.) Monitoring is likely to be required in initial years. employees.
Require companies to pay tax as for Partially met The reservation immediately above applies. Some may also consider it unfair that taxpayers in this situation are required to pay tax through an agency relationship, whereas situations where income is received from an unrelated party do not require an agency relationship. Partially met The reservation immediately above applies. The compulsory nature of this option also means that some taxpayers who may be happy with the status quo will be required to use it and will identify themselves as incurring additional compliance costs. However, there will be no compliance costs incurred in choosing whether or not to implement this option, and administration will be simplified. Partially met This option is both fair and reduces the compliance cost impact of provisional tax. However, there may be objections to the compulsory nature of this option. No impact Subject to the condition described Exclude shareholder salaries from provisional tax entirely and allow tax to be paid at terminal tax date. Not met who fall under this rule would have a timing advantage and removal of interest benefit over those who derive non-source deducted income from non-associated sources, and those who derive income subject to source deduction, as both groups pay tax as income is earned. Met There would be a significant reduction in compliance cost as a result of removing those associated with small business from provisional tax. Not met While the timing advantage this option would create would not threaten the broad base, low rate philosophy which underpins the New Zealand tax system, this kind of difference would still create a risk that other provisional taxpayers would seek similar concessions and undermine the key concept of paying tax on income as it is earned.. Revenue cost Introduction of this option would delay the receipt of revenue compared with the status quo. It could also encourage greater amounts to be paid out to shareholders – and so taxed at lower rates – instead of being retained in the company. employees.
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Status quo Not met Some contractors are not paying their fair share of tax and are claiming social policy benefits they are not entitled to. Contractors and employees are often doing very similar work, yet have very different rules apply to them. Not met Contractors not subject to withholding have to manage their own tax obligations. Contractors subject to withholding face inflexible rules and are not given effective tools to self-manage. Does not decrease compliance costs for payers (unlike options 2 and 3). Higher processing and enforcement for Inland Revenue. Not met Some employers and contractors are structuring to the rules and avoid paying their fair share of tax. No impact 2. Electing own withholding rate Met Contractors in the schedular payment rules are currently generally over-deducted from resulting in a cash-flow cost to them that other contractors do not have. This change will make it easier for them to have the correct amount deducted. Met Contractors that are subject to withholding will be more flexibility to pick the correct rate of withholding. Their compliance costs will decrease as they will not have to apply for a special tax code to change their rate of withholding and therefore can more easily get their tax obligations right from the start. Payers of contractors may have an increase in compliance as they will have to more frequently change withholding rates. However, this is expected to be small and outweighed by the decrease in compliance costs for contractors. Inland Revenue will have less administration from administering special tax code applications and end of year tax bills and refunds. No impact The measure is expected to have an initial upfront fiscal cost of approximately $54 million (of which $19 million is recovered in following two years). This upfront cost arises primarily because the majority of contractors in the schedular payment rules are currently and receive a tax refund in the following year. This provides a one year fiscal benefit to the government. The proposal is expected to
decrease the number of contractors who are and therefore reduce this fiscal benefit to the government. 3. Voluntary withholding agreements Met Contractors will be able to voluntarily choose to have withholding apply and so have similar treatment to employees. Met Compliance for contractors who enter voluntary agreements will decrease as they have an easier means to pay their tax. Administration costs for Inland Revenue will decrease for these contractors as well. No impact Marginal upfront gain. 4. Extending withholding to labour-hire firms Met Contractors working for labour-hire firms will not be able to avoid paying their fair share of tax and claim social policy benefits they are not entitled to. This option would make the treatment of employees and contractors more similar for tax purposes. Met Will reduce compliance costs for labour-hire firm contractors as they will have an easier means to pay their tax. Compliance will increase for labour-hire firms. However, this is expected to be less than the decrease in compliance costs for contractors and as a result overall compliance costs are expected to decrease. Large labour-hire firms have reported that the compliance costs of the proposal for them would be low, while smaller firms have reported that the compliance costs would be higher. Reduced administration for Inland Revenue in processing and enforcement for labour-hire firm contractors. Met Contractors working for labour-hire will not have the opportunity to structure to avoid paying their fair share of tax. Some contractors may attempt to avoid the rules by contracting with clients directly; however following consultation with labour-hire firms we consider that this impact will be low. The impact of this option is difficult to measure as it relies on estimations of the hidden economy. A conservative estimate shows a revenue benefit of $5 million-$10 million a year.
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Retain the status quo Partially met Taxpayers in similar circumstances are treated in a similar way. However, for some taxpayers, imposing the financial penalty may be disproportionate to their circumstances and may be viewed as unfair. Once the existing debt is significant, any additional financial penalty becomes ineffective at motivating the taxpayer to actively attempt to comply. It is unfair to repeatedly impose unreasonably high financial penalties for the late payment of tax. Not met Continue to create compliance costs for taxpayers having to pay significant financial penalties in order to repay their tax debt in full. Continue to create compliance costs of stress and anxiety on taxpayers, due to the high growth of their tax debt. Higher administration and enforcement for Inland Revenue, to manage and recover tax debt. Not met High growth of penalties leads to many taxpayers becoming insolvent. Their continued leads to Inland Revenue taking legal action. As a result other taxpayers become negatively affected. Some taxpayers are incurring significant penalties on tax debt, only for them to be later written off, leading to uncertainty about how many outstanding late payment penalties are recoverable. The overall portion of financial penalties in the debt book that are unrecoverable will continue to increase. No impact
2. Reduce the rate of the incremental late payment penalty. Partially met While the incremental late payment penalty rate is reduced, the combined penalty and interest rate may be too high to effectively encourage significantly indebted taxpayers to engage with Inland Revenue. Lacks fairness as Inland Revenue continues to impose a high combined rate, while expecting the taxpayer to be motivated to repay their tax debt. Taxpayers will continue to have a financial incentive to into an instalment arrangement. Partially met Taxpayers will continue to incur significant stress and anxiety in attempting to resolve their tax debt, due to the continued imposition of penalties on their tax debt long after it is due. Inland Revenue likely have a small reduction in its administration and enforcement costs (compared to the status quo), due to the smaller incremental late payment penalties being added to the tax debt book. Not met Unpaid and potentially uncollectible incremental late payment penalties will continue be added to the debt book, though this will be less than the status quo. This option would likely have a negative revenue impact, lower than the recommended option. 3. Remove the 1% incremental late payment penalty Partially met Maintains fairness between compliant and non-compliant taxpayers, as taxpayers will continue to have an incentive to pay their tax liability by the due date or shortly after. While some taxpayers will no longer receive a financial incentive to enter into an instalment arrangement, they will continue to receive certainty that Inland Met Keeping the tax debt at a more manageable level for longer will allow taxpayers more opportunity to resolve their tax debt, reducing their stress and anxiety. Inland Revenue’s administration and enforcement costs will reduce as less uncollectible Met Less uncollectible penalties are added to the debt book. The value of the debt book will more fairly reflect what is collectible, giving more certainty to government about its value. The total cost over four years is $87 million.
Revenue will not take enforcement action. penalties will be added to the debt book. 4. Remove all late payment penalties and impose UOMI only. Not met Unfair for compliant taxpayers as the financial cost of a taxpayer’s non-compliance has been completely removed. There is no penalty imposed on taxpayers that do not pay on time. Not met Reduced compliance impact as taxpayers will have reduced growth in their tax debt. However overall, the compliance impact may increase as indebted taxpayers will have more interaction with Inland Revenue as Inland Revenue make greater attempts to encourage them to pay the tax debt. Likely increase in Inland Revenue’s administration and enforcement costs due to an increase in total tax debt being managed. Not met A UOMI only rate may lead to some compliant taxpayers deciding that it is financial justification to pay other creditors instead of Inland Revenue and thus become non-compliant. The lack of a penalty for non-compliance would likely lead to an erosion of taxpayer confidence in the integrity of the tax system, as compliant taxpayers will perceive that non-compliant taxpayers are not being penalised. This option have a higher cost than the recommended option. This makes this option less viable for the government. 5. Broad discretion to impose penalties based on individual circumstances Not met Due to the level of subjectivity in the decision making process, it is highly unlikely Inland Revenue will be able to ensure consistency in Not met Taxpayers will incur higher compliance costs with increased contact with Inland Revenue to discuss Not met This option rewards taxpayers that successfully evade Inland Revenue. The impact is difficult to measure as it relies on subjectivity. Therefore it is not
decisions. Over time this could give rise to significant differences in treatment between taxpayers in similar circumstances. Taxpayers with more knowledge of the tax system would be more likely to be successful in not having a late payment penalty imposed. their non-compliance and to establish the value of the financial penalty. Very complex to understand and to implement. High administration costs to Inland Revenue. Unfairness in treatment will lead to taxpayers losing confidence in the integrity of the tax system and its administration by Inland Revenue. possible to estimate its fiscal impacts.
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue impact 1. Retain the status quo Not met Non-compliant businesses are able to continue trading while compliant businesses bear the risk. Not met Compliant businesses can face high costs due to poor information on tax debt. Enforcement agencies and Inland Revenue have some inefficiency in administration in of habitually businesses and directors. Not met Taxpayers in significant tax debt can choose to isolate it from other obligations while it grows, or until the business collapses. No impact 2. Share significant tax debt information with credit reporting agencies Met Disclosure will only take place when it is a proportionate response to the risk represented by taxpayer debt to the business community. Compliant participants can operate with less risk due to more information. Met The cost of business generally is reduced due to better information supporting better decision making. Met Taxpayers who fail to address significant debt will not be able to use tax secrecy laws to hide this debt and undue risk to compliant taxpayers. Potentially positive Compliant businesses will be less vulnerable to the adverse effects of businesses collapsing. Also potentially positive as a result of an additional incentive to debt. 3. significant tax debt information with general public Not met Affected taxpayers will be exposed to an inappropriate level of risk, with fewer safeguards, as a result of Not met Potentially inefficient in terms of both compliance and administration costs because of high risk of inappropriate use of information. Partially met While taxpayers would not be able to hide significant debt using secrecy rules, the risk of inappropriate uses of their information may be Potentially positive Compliant businesses will be less vulnerable to adverse effects of other businesses collapsing. compliant
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Retain the status quo Met Completely fair, as the business proportion of actual expenses is deductible. Not met Inefficient to comply with, due to the number of expenses and the small amount of tax. Not currently time-consuming to administer. Met The actual calculation can be complicated. No impact 2. Optional single rate for Vehicles Met Generally fair, as the rate will be approximately accurate for most vehicles and owners of more expensive vehicles can elect to deduct based on their actual expenses. However owners of older cars may be able to claim greater deductions than their actual expenditure. Met More efficient for taxpayers to comply with, due to single rate calculation. Also easier to audit, but not otherwise easier to administer. However some taxpayers may elect to calculate their deductions under both this method and the other currently available methods so they can claim the greater amount. This would increase the tax calculations for such taxpayers. The measure will impact sole traders who use their vehicle for both business and personal purposes. There are up to 3,500 such taxpayers. Met The actual calculation is easier, rates will be broadly accurate for most taxpayers, and there is a significant cost floor for vehicle use. Small cost Taxpayers with older vehicles may be able to deduct more than their actual expenditure, while taxpayers with newer or more expensive vehicles can elect not to use the method. The estimated fiscal cost for this option is $700,000 per year.
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Status quo for premises Met The business proportion of actual expenses is deductible. Not met Inefficient to comply with, due to the number of expenses and the amount of tax. Met Generally sustainable. However the actual calculation can be complicated. No impact 2. Optional single rate for premises Met The rate should be fairly accurate and taxpayers will still have the option to deduct based on actual expenses. Some taxpayers may be able to claim greater deductions than their actual expenditure. This is not expected to be significant however, due to the small variance in utility charges. Met More efficient for taxpayers to comply with, due to single rate calculation. Also easier to audit, but not otherwise easier to administer. However some taxpayers may elect to calculate their deductions under both this method and the actual cost method so they can claim the greater amount. This would increase the tax calculations for such taxpayers. The measure will impact sole traders who use their premises for both business and personal purposes. There may be up to 3,500 such taxpayers. Met The actual calculation is easier. cost Taxpayers could elect to use this method only if it increased their deductions compared with the actual cost method. There is insufficient data to estimate this cost, however it is expected to be fiscally immaterial due to the small variance in utility charges. 3. Single rate for premises Met The rate for utilities etc should be fairly accurate across taxpayers and the more Met More efficient for taxpayers to comply with, due to single rate calculation. The measure will impact the same number of Met The calculation is easier than the status quo. No impact There should not be any fiscal cost or savings, as the rates will be set
Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Status quo Met Generally fair. Not met Inefficient, as taxpayers must to Inland Revenue to small errors. Met No impact 2. Increase threshold to $1,000 Met Met More efficient, as taxpayers can self-correct larger errors. The measure will affect all taxpayers who make low value minor errors. Met Although less Inland Revenue oversight of error correction slightly increases the potential for abuse. No impact 3. Increase threshold to $2,000 Met Met As above, except a greater efficiency increase and impact with the greater threshold. Partially met As above, although the impact on sustainability increases with the greater threshold. No impact 4. Revenue percentage threshold Not met Unfair as large taxpayers will be able to self-correct larger errors, but arguably fair given the relative significance of the error to the business. Met As above. Partially met As above, except there could be a significant impact on sustainability for large taxpayers, as they could make significant tax adjustments without Inland Revenue oversight. Measure may be abused There might be an impact if large taxpayers abuse the measure to defer income; however this is not possible to estimate.
Officials’ analysis of the options is set out in the table below. Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Status quo Met Existing rule applies to all taxpayers. Not met Inefficient to comply with, due to the need to track employee payments paid within 63 days of end of income year. Met The rule is well-established. However actual calculation can be time-consuming particularly for employers. No impact 2. Optional 63 day rule Met Taxpayers will choose whether to apply the existing deferred payment rule or not. Taxpayers will weigh up increased deductions under the existing rule against the compliance costs associated with the existing rule. Met More efficient as taxpayers will have a choice whether to continue applying the existing rule or use the information in financial accounts. Administratively Inland Revenue will not monitor what option taxpayers elect. Met Taxpayers wanting to continue with the existing rule will not be affected and those not wanting to do the calculation required under the existing rule can apply the simpler rule. Small upfront gain No change to overall amount of deduction over time. 3. Optional 63 day rule for different classes of employee remuneration Met Taxpayers will choose whether to apply the existing deferred payment rule to different classes of employee remuneration. Taxpayers will weigh up the benefit of an increased deduction under the existing rule against the compliance costs associated with the existing rule. Partly met Taxpayers will have a choice whether to continue applying the existing rule or use the information in their financial accounts for different types of employee remuneration. Administratively Inland Revenue will not monitor what option taxpayers elect. Met Same reasons as except that taxpayers will be using different timing rules and deductibility for the same type of expenditure. Small upfront gain No change to overall amount of deduction over time.
Officials’ analysis of the options is set out in the table below. Options Fairness and equity Efficiency of compliance and administration Sustainability of tax system Revenue 1. Retain the status quo Not met Existing rule treats companies like other companies who provide benefits to their However close companies are often similar to sole traders and partnerships that use different rules. Not met Inefficient to comply with due to having to register and pay FBT when close companies provide sole benefit to their Not met Generally sustainable as the existing rule treats close companies like other companies that provide fringe benefits. However close companies can structure motor vehicle arrangements to minimise or avoid FBT liability. No impact 2. Option for close companies to use motor vehicle expenditure rules Met Provides an option to enable close companies to be treated the same way as a sole trader when accounting for the use of a motor vehicle. Met More efficient as close companies will have a choice whether to register for and pay FBT or use the motor vehicle expenditure rules. Met Generally sustainable as provides a choice for close companies as to how they account for the private use of a motor vehicle by their fiscal cost Attributable to a reduction in FBT paid over time.