C o r p o r a t e T a x p a y e r s G r o u p

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1 C o r p o r a t e T a x p a y e r s G r o u p c / - R e b e c c a O s b o r n l D e l o i t t e l P O B o x l W e l l i n g t o n l ( 0 ) C T G Clerk of the Committee Finance and Expenditure Select Committee Parliament Buildings WELLINGTON Dear Sir / Madam TAXATION (BUSINESS TAX, EXCHANGE OF INFORMATION, AND REMEDIAL MATTERS) BILL and SUPPLEMENTARY ORDER PAPER 190 The following submission has been prepared by the Corporate Taxpayers Group ( the Group ) on the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill ( the Bill ) and Supplementary Order Paper 190 ( the SOP ). The Group has taken the opportunity to comment in detail on those reforms that are of particular interest to our members. The Group would welcome the opportunity to make an oral submission to the Committee on our submission. ABOUT THE GROUP INFORMED, PRINCIPLED, PRACTICAL About the Group The Corporate Taxpayers Group is an organisation of major New Zealand companies that works with key Inland Revenue and Treasury officials to achieve positive changes to tax policy in New Zealand. The objective of the Group is to pursue the principled interests of its members in the tax sphere. Significant stakeholders of Group members are New Zealanders, and therefore a New Zealand economy and society that is functioning well is in the interests of the Group. The practical experience of Group members enables it to encapsulate general economic concepts into principles that guide and underpin its submissions. Contact the CTG: c/o Rebecca Osborn, Deloitte PO Box 1990 Wellington 6140, New Zealand DDI: rosborn@deloitte.co.nz We note the views in this document are a reflection of the views of the Corporate Taxpayers Group and do not necessarily reflect the views of individual members.

2 Page 2 of 29 The Group s Principles for a Good Tax System The Group believes that a good tax system for New Zealand should be built around the following principles: High certainty and low business risk: For the corporate sector, tax is not just a cost of doing business but is also a very significant risk. Funds are raised, staff hired, and investments made on the basis of expected returns to corporate shareholders / owners. If tax rules increase business risk by creating uncertain or unexpected tax outcomes then the rate of return on investment has to be higher to compensate for this. Higher required rates of return mean less investment and fewer jobs, to the detriment of the economy. To lower business risks caused by the tax system, tax rules need to be as certain as possible and they need to be administered and interpreted by the Inland Revenue Department consistently and speedily. Having a high level of certainty over the medium to long term is of high importance to the Group. Low compliance costs: Compliance costs imposed by the tax system are a deadweight economic cost. Tax compliance costs represent resources consumed producing nothing. Those resources would be better employed creating jobs and raising the wealth of New Zealand. International competitiveness, especially with Australia: Taxes are a significant cost of doing business. The higher those costs are in New Zealand relative to other countries, the higher the relative costs of doing business in New Zealand. That flows through to less investment, fewer jobs and lower wealth. New Zealand s tax system plays a critical role in our competitive position with our major trading partners and competitors. In addition to attracting foreign investment, a competitive tax system is one that ensures that New Zealand is attractive as a base for outbound investment. While New Zealand businesses compete with the rest of the world for investment funding, markets and skilled workers, Australia is our nearest and most significant competitor. For that reason the Group considers that the New Zealand tax system should set as a minimum benchmark, a system that provides a business environment at least as good as that which exists in competing countries, especially Australia. The above principles are central to the way the Group judges tax policy issues. EXECUTIVE SUMMARY OF SUBMISSION POINTS The Group has summarised its submission points below and has provided detailed submission points in the following appendices: Appendix One Business Tax reforms Appendix Two Automatic Exchange of Information Appendix Three Supplementary Order Paper 190 Appendix Four Suggested amendments to proposed section 227B General comment The Group would like to briefly comment on the consultation process for this Bill. The Bill was introduced into Parliament on 8 August 2016 and had its first reading on 11 August Submissions on the Bill close on, which only provides interested parties with a very short timeframe in which to digest the Bill, consider the issues and then make comment on it. This was further exacerbated by the fact that a supplementary order paper (Supplementary Order Paper 190) was issued subsequent to the Bill s introduction, on a matter that has not previously been subject to public consultation.

3 Page 3 of 29 In the Group s view, it would be preferable if more time was provided for submitters to consider the amendments to this Bill, particularly given the Bill has fundamental changes to the way taxes are paid that impact many taxpayers. A shorter consultation process runs the risk that issues with this legislation may not be picked up or not be given sufficient attention given the limitations on submitters resources to achieve this within the imposed timeframe. An example of this was seen last year where amendments to the Tax Administration Act 1994 ( TAA ) as part of the Budget 2015 property compliance proposals introduced a requirement that non-residents must have a bank account prior to receiving an IRD number. While we understand the issues with this requirement were raised, it is likely that sufficient attention was not given to them given they were bundled with other property compliance proposals which had to be progressed within a short timeframe. Many of the practical issues associated with this law change were not thought through or even realised prior to the legislation being enacted. The IRD number requirement has created headaches for taxpayers and Inland Revenue, increased compliance costs and has resulted in some instances where non-residents have been unable to pay tax to Inland Revenue due to the lack of an IRD number. We submit that in future, stakeholders are given more time to consider and submit on Tax Bills, particularly where proposals have not been subject to the full generic tax policy process ( GTPP ). As noted above, the reforms in SOP 190 are an example of this. We will comment further on those reforms in our submission. Business Tax reforms Provisional tax: accounting income method The Group supports AIM in principle, noting that the legislation contains no detail of what is required to calculate tax under AIM. This detail is still to be provided through Determinations. The Group supports AIM being available to taxpayers with gross income in excess of $5million. The Group acknowledges the Bill contains a concept in proposed section 45C of the TAA of a large business AIM-capable system. We support the efforts of Officials who are currently developing further proposals in this area. If the AIM method is expanded to larger taxpayers on a voluntary basis, the payment dates should be on a quarterly basis. Proposed section RC 9 currently requires provisional tax payments under AIM to be made with each GST return instalment, which would be monthly for large businesses. The Group does not support this frequency of payment. We do not support the proposed amendment to exclude AIM provisional tax payments from tax pooling provisions. We are concerned this would prevent taxpayers who subsequently enter into a dispute with Inland Revenue to access tax pooling. Inland Revenue should release guidance on how the penalties for not taking reasonable care and for taking an unacceptable tax position will be applied in the context of the AIM method.

4 Page 4 of 29 Use of money interest We support the amendments to the safe harbour method for provisional taxpayers who use the standard uplift method. However, we submit that the standard uplift rates should be decreased in line with current inflation levels (we suggest 103% and 106%). An amendment should be included in this Bill to exclude the impact of one-off disposals of assets in calculating a taxpayer s RIT under the standard uplift method. While the Group accepts that UOMI should not be payable if a taxpayer switches to the estimation method for the third provisional tax instalment, the Group does not believe that the option to estimate provisional tax at the final instalment should be removed. Alternatively, it should be made clear in legislation that there are not adverse consequences for taxpayers if an accurate amount of tax is paid at the final provisional tax instalment date, rather than the legal liability set under the standard uplift method of calculating provisional tax. The Group is generally comfortable with the requirement that wholly-owned groups of companies are required to pay provisional tax using the same method if they want to benefit from the UOMI safe harbour. Inland Revenue should publish in a Tax Information bulletin clear guidance on what will constitute a provisional tax interest avoidance arrangement and include illustrative examples to assist taxpayers in determining what is permissible and impermissible behaviour. Allowing contractors to elect their own withholding rate The Group is supportive of contractors currently in the schedular payment withholding rules to be able to elect their own withholding rates. However, the limitations on a contractor changing their withholding rate should apply if a contractor has changed their rate one time in a 12 month period, rather than twice. While the Group understands the move towards increased use of withholding taxes, the Group is not supportive of ad hoc additions to the withholding tax rules. The Group s preference is that a fundamental review of the withholding tax rules is undertaken to determine what the overall withholding tax framework should look like. Extending withholding to labour-hire firm contractors The Group submits greater clarity is needed on when a person has a main activity of arranging for a person or persons to perform work or services directly for clients. Incremental late payment penalties We support the proposed amendment to no longer apply a 1% monthly incremental penalty in relation to certain tax types. However, we would like to see further flexibility in the penalty rules such as removing late payment penalties from provisional tax payments that are already subject to UOMI. Disclosing reportable unpaid tax to credit reporting agencies The Group is broadly supportive of these proposals, however we believe the legislation is unclear and needs to be reviewed to ensure its accuracy with the policy intent.

5 Page 5 of 29 Information sharing with the Registrar of Companies The Group does not have a particular issue with the proposal to share information with the Registrar of Companies. However, we note that Inland Revenue should consider developing an overall principle/framework for sharing of information between Government departments, rather than developing policy on an ad hoc basis. The Group is concerned there is no clear destination as to where information sharing between Inland Revenue and other Government departments is ultimately heading. Increased threshold for taxpayer self-correction of minor errors The Group supports the direction of the proposal to increase the self-correction threshold from $500 to $1,000. However, in the Group s view the threshold should also allow for larger adjustments based on the level of tax being paid to better support self-assessment and reduce compliance costs for both Inland Revenue and taxpayers. Removal of the requirement to renew RWT exemption certificate annually The Group supports the proposal that resident withholding tax ( RWT ) exemption certificates be issued for an unlimited period. We also submit that this could be extended to other types of exemption certificate. Modifying the 63-day rule on employee remuneration The Group is supportive of this proposal. However, the Group believes that if a taxpayer has audited financial statements, the taxpayer should be able to take a deduction for accrued employee expenditure on the basis that such expenditure is incurred. Automatic exchange of information Officials should, as soon as possible, issue a draft determination (or other draft guidance) describing the categories of accounts that will be excluded accounts. Those should include accounts that are excluded for the purposes of FATCA. Clause 13 should be clarified as regards the interaction between the different penalties in proposed section 142H of the TAA. Further, the penalties in proposed sections 142H(1) and (3) for strict liability breaches should be capped at $10,000 (being half the penalty imposed for a first failure under proposed section 142H(5) for failure to take reasonable care). Current versions of all OECD material relevant to the CRS publication and the CRS standard should be required to be available on Inland Revenue's website. References to material incorporated into domestic law "as amended from time to time" or "as amended at the time" should be changed to references to the date that the relevant material was last updated, and provision made for amendments to be specifically incorporated into the TAA definitions of the CRS and its commentary by Order in Council. Otherwise, the obligations of taxpayers under New Zealand law would be able to be amended by the OECD without any approval of the Executive (let alone the Parliament) of New Zealand, which seems constitutionally inappropriate.

6 Page 6 of 29 Supplementary Order Paper The Group submits that proposed section 227B (a power to make regulations which would have the effect of amending the provisions of the TAA) is too broad in its scope relative to the stated purpose. If proposed section 227B is enacted, amendments are necessary to refine its scope and to ensure that the proposed consultative process is meaningful. The Group has suggested amendments to this effect which are set out in Appendix Four to this submission. For your information, the members of the Corporate Taxpayers Group are: 1. Air New Zealand Limited 20. Methanex New Zealand Limited 2. Airways Corporation of New Zealand 21. New Zealand Post Limited 3. AMP Life Limited 22. New Zealand Racing Board 4. ANZ Bank New Zealand 23. New Zealand Steel Limited 5. ASB Bank Limited 24. New Zealand Superannuation Fund 6. Auckland International Airport Limited 25. Opus International Consultants Limited 7. Bank of New Zealand 26. Origin Energy New Zealand Limited 8. Chorus Limited 27. Pacific Aluminium (New Zealand) Limited 9. Contact Energy Limited 28. Powerco Limited 10. Downer New Zealand Limited 29. Shell New Zealand (2011) Limited 11. Fisher & Paykel Healthcare Limited 30. SKYCITY Entertainment Group Limited 12. Fletcher Building Limited 31. Sky Network Television Limited 13. Fonterra Cooperative Group Limited 32. Spark New Zealand Limited 14. General Electric 33. T & G Global Limited 15. Genesis Energy Limited 34. The Todd Corporation Limited 16. IAG New Zealand Limited 35. Vodafone New Zealand Limited 17. Infratil Limited 36. Westpac New Zealand Limited 18. Lion Pty Limited 37. Z Energy Limited 19. Meridian Energy 38. ZESPRI International Limited We note the views in this document are a reflection of the views of the Corporate Taxpayers Group and do not necessarily reflect the views of individual members. Yours sincerely John Payne For the Corporate Taxpayers Group

7 Page 7 of 29 APPENDIX ONE BUSINESS TAX REFORMS 1. General comments 1.1 The Group is generally supportive of the business tax reforms included in the Bill and notes that it is pleasing to see the Government directing its attention towards simplifying tax for business. Many of the proposed reforms will reduce compliance costs for businesses and are positive for New Zealand s tax system generally. In particular, the interaction of provisional tax with the use of money interest ("UOMI") rules has been an area where the Group has been seeking reform for a long time, and we welcome the changes in this area. 1.2 In the Group s view, there needs to be a continuing focus on making the tax rules simpler for business, and this is an area for ongoing improvement. While these reforms are positive in many areas, they come with complex anti-avoidance rules (which we discuss further in our submission), which have been designed on the premise that taxpayers will game the system in absence of such rules. These rules undermine the simplicity of the proposals. The balance between precise rules and simplicity should be a key area of focus for the Government 2. Provisional tax: accounting income method General comments The Bill proposes a new method of paying provisional tax the accounting income method (AIM). Under the proposed changes, provisional tax would be integrated into business processes and payment amounts would be based on current year tax-adjusted income. 2.1 The Group is supportive of AIM as a new method of paying provisional tax, however we believe that this method should be available to larger taxpayers. We expand on this further under the next subsection. 2.2 As the AIM method will be unfamiliar to taxpayers, the Group supports taking a lenient approach during the first few years after introduction with a focus on education rather than enforcement, particularly given less sophisticated taxpayers are the target of this method. Such an approach will ensure that taxpayers are encouraged to utilise this method if it is appropriate to their circumstances. 2.3 We consider that when the AIM method is introduced, resources should be devoted to ensuring that: The AIM method is well publicised when it is introduced; Clear guidance is given to taxpayers on use of the AIM method; and The software developed should be user friendly, while ensuring that the provisional calculation is based on reliable data. 2.4 Our submission provides more specific comments on the proposals in the Bill below.

8 Page 8 of 29 AIM approach eligibility criteria The Bill proposes the criteria that must be met before a taxpayer can use the AIM approach to calculate their provisional tax, and proposes that a taxpayer can be removed from AIM in particular circumstances. Specifically the taxpayer must be using an AIM-capable accounting system as defined in new section 7B (2) of the Act and they must have annual gross income of $5 million or less. Proposed new section 45C of the Tax Administration Act 1994 will also allow the Commissioner to approve an AIM-capable accounting system for use by business with earnings over $5 million. The proposed amendments will apply for the and later income years. 2.5 The Group is supportive of the proposal to allow larger taxpayers with gross income of over $5 million to use AIM if they are in a particular class of businesses using software that has been approved for large AIM businesses. This is the first step in the right direction towards expanding the AIM approach to larger taxpayers. We welcome this and we look forward to being involved in further consultation as these proposals develop. 2.6 In the Group s view, a number of large corporates would benefit from using AIM as a basis for calculating provisional tax obligations, in particular those who have seasonal or volatile income who see a real benefit in being able to pay provisional tax based on actual earnings to date. Such taxpayers may not be able to use a prepackaged Inland Revenue-approved accounting software package that automatically makes tax adjustments to calculate provisional tax under the AIM method. 2.7 However, there are other ways to ensure rigour in the calculations. We understand Inland Revenue is considering an approval process where a taxpayer s provisional tax processes would be signed off. Given large corporates have specialist finance / tax personnel who can more easily understand the legislative requirements we think such a safe guard is sufficient and appropriate. 2.8 For completeness we note that while small taxpayers using AIM will need to make provisional tax payments at the same time as it makes a GST payment, such a frequency would not be appropriate for large corporates who pay GST monthly. Some flexibility for large corporates in terms of payment frequency will be required. Interest and penalties Proposed new section 120 KBC of the Tax Administration Act provides that when a taxpayer makes the payments as calculated by their AIM-capable software, they will not have any UOMI exposure should the year-end residual income tax result in a different tax liability. AIM users will continue to be subject to reasonable care and, in some cases, unacceptable tax position penalties.

9 Page 9 of 29 The proposed amendments will apply for the and later income years. 2.9 The Group is supportive of this proposal, and we agree that if a business is relying on AIM capable software to calculate their provisional tax payments, it would be unfair if they were to be exposed to UOMI Penalties relating to taking reasonable care will apply to AIM calculations. Given this, the Commissioner should issue guidance to taxpayers as to what will constitute reasonable care in the context of AIM calculations, particularly as taxpayers with limited tax technical knowledge may be preparing such calculations. AIM users will now being taking a tax position multiple times per year, whereas previously this only occurred when an income tax return was filed. This will take some adjusting to and taxpayers need to be aware of the consequences of taking a tax position. Inland Revenue should also work with the software providers to make sure such guidance is easily accessible. Tax pooling The Bill proposes that AIM provisional tax payments be excluded from tax pooling provisions. The proposed amendments will apply for the and later income years While we agree that taxpayers using AIM should need to make their provisional tax payments directly to Inland Revenue, those taxpayers should not be locked out of the tax pooling rules for re-assessments. It is unclear whether it is intended that tax pooling could be used for disputes The commentary to the Bill notes that tax pooling is intended in circumstances where a taxpayer faces uncertainty and AIM is based on known amounts. This clearly is not the case where a taxpayer is subject to a re-assessment following a tax dispute. To exclude taxpayers who use AIM from the tax pooling provisions in circumstances where there is a re-assessment would leave that business facing a larger UOMI liability than what would have been available under tax pooling In the Group s view, the need for tax pooling to cover disputed amounts of tax only arises due to the penal impact of the UOMI rates which are much higher than market lending rates. As the Group has previously advocated, we believe that the UOMI should be lower when a re-assessment has been made. We note that such a concessional treatment already applies in Australia. This would be more appropriate in situations where the taxpayer has taken a genuine tax position in the first instance, but the disagreement with Inland Revenue lies at the margins of how the tax law applies to a particular transaction.

10 Page 10 of Use of money interest Safe harbour for all provisional taxpayers using standard uplift method The amendments modify the calculation of use-of-money interest (UOMI) for taxpayers who use the standard uplift method to calculate their provisional tax. New section 120KBB of the Tax Administration Act 1994 provides that where a taxpayer makes the instalments required by the standard uplift method for the first two provisional tax payments, no UOMI will apply to those instalments. Instead UOMI will only apply from the date of the third instalment. The amendments will apply from the beginning of the income year. 3.1 The Group is supportive of this reform. This is an issue that the Group has championed for a long time (dating back to 2007), and we are appreciative of the Government introducing changes to remedy this issue. 3.2 However, we would like to see the current standard uplift rates decreased. Currently taxpayers must pay in provisional tax 105% of their prior year residual income tax RIT ) or if their prior year return is not filed 110% of RIT from two years prior. In the Group s view, the use of the standard uplift could in many instances result in taxpayers systematically overpaying their tax. 3.3 In a non-inflationary economy, the current uplift of 110% of RIT when the previous year s tax return has not been filed is too high. At the first and second provisional tax instalment dates, many taxpayers would be paying provisional tax based on a 110% uplift of their RIT from two years prior, as the prior year s tax return is yet to be filed at this point. This is because most business taxpayers are on a tax agency listing, and as such the second instalment of provisional tax is due before the tax return filing deadline. Taxpayers could avoid this by estimating their provisional tax liability, however few taxpayers would do this in practice because the risk of getting the estimate wrong is too costly due to the penal impact of the current UOMI rates (the current UOMI underpayment rate is 8.27%), which will apply from the first instalment date. 3.4 The Group considers that the level of uplift should have regard to (and could even be linked) to CPI. Since 2000, New Zealand s CPI inflation has averaged 2.7%. 1 Given the Reserve Bank s inflation target of between 1 and 3%, an uplift at the upper limit of this range would seem more appropriate than the arbitrary 5% and 10% ratios. Accordingly, the Group proposes that the uplift percentage applying under the standard uplift method could be reduced to 106% (for the year before the prior year) and 103% (for the prior year). 3.5 Reducing the uplift percentage would mean that taxpayers are less likely to overpay their tax (and consequently, they would have more funds throughout the year to invest into their businesses or employ for other productive purposes). Overall, the correct tax would still be paid, as in practice any outstanding tax liability would largely have been paid at P3 as taxpayers would be able to accurately estimate their 1

11 Page 11 of 29 provisional tax liability by this point, and would be incentivised to do so under the new rules to minimise their UOMI burden. Adjustment for one-off fluctuations in RIT 3.6 While not an amendment included in this Bill, we submit that the impact of one-off fluctuations in RIT should be excluded from consideration under the standard uplift method for determining a taxpayer s provisional tax obligations. For example, a oneoff sale of a large amount of capital assets creating depreciation recovery income would give rise to a large, but one-off increase in RIT for a particular tax year which would not be reflected in the following year s RIT. It would be inaccurate to include such a one-off increase in the previous year s RIT figure for the purposes of determining provisional tax obligations for the following year. A taxpayer could estimate their provisional tax liability for the current year, however they would be at risk of incurring UOMI. A taxpayer who wishes to avoid paying UOMI would be required to overpay their tax when their previous year s RIT includes a one-off item. 3.7 To ensure that Inland Revenue had sufficient information, a short form could be filed by the taxpayer outlining the details of the one off fluctuation. If Inland Revenue is concerned such an approach would be abused, a list of acceptable one-off events could be created. 3.8 We note that under the GST ratio method for calculating provisional tax, s RC 19 of the Income Tax Act 2007 allows an adjustment to the calculation method to exclude the impact of the disposal of an asset that is not revenue account property. We submit that a similar exclusion should be included in the standard uplift method to remove the impact of depreciation recovery income arising from the disposal of property that is not revenue account property from the previous year s RIT. We submit that an amendment should be included in this Bill to achieve this. Limits on ability to switch between uplift and estimation methods It is proposed that if a taxpayer pays provisional tax using the uplift method for calculating their provisional tax obligations at the first and second instalments dates, they will be prevented from switching to the estimation method at the final instalment. 3.9 The rationale for this proposal is to prevent taxpayers gaming the system by paying provisional tax based on the uplift method at the first and second instalments, thus insulating the taxpayer from any UOMI cost, then switching to the estimation method at the third instalment if it transpires that the taxpayer has overpaid provisional tax in order to receive UOMI from Inland Revenue We agree that taxpayers shouldn t be able to game the system in this manner but disagree with the way Inland Revenue has proposed to achieve this as this unnecessarily intermingles tax payment mechanism with the imposition of UOMI. In the Group s view there is value in taxpayers being able to pay based on an estimate at the third instalment when it has become clear that payment on uplift will result in an overpayment of tax. To allow this to occur the Group suggests that where a taxpayer switches to the estimate method at the third instalment they simply be ineligible to receive (or be charged) UOMI on their provisional tax payments prior to the final instalment date.

12 Page 12 of Being able to file an estimate gives taxpayers certainty as to any exposure to late payment penalties and would mean that the taxpayer is not forced to overpay tax at the third instalment. It would also be effective from an Inland Revenue administration perspective as Inland Revenue would not need to follow up perceived underpayments of tax. Currently, follow up notices are issued where a taxpayer pays less provisional tax than their legal liability calculated under the relevant method Alternatively, it should be made clear in legislation that there are not any adverse consequences for taxpayers if an accurate estimate of tax is paid at the final provisional tax instalment date if this is lower than the legal liability set under the standard uplift method of calculating provisional tax For example, Company A has a legal liability under the uplift method to pay $300,000 in tax; i.e. $100,000 at its 3 provisional tax instalment dates. Company A pays $100,000 at the first two payment dates. As the final provisional tax instalment is due after year end, Company A has been able to review its full year accounts and expects its actual tax obligation for the year to be $250,000. Rather than pay $100,000, Company A would prefer to pay only $50,000 (total provisional tax payments $250,000) but Company A s Directors are concerned that if Company A does not pay the full amount of tax legally owing that there will be exposure to late payment penalties, potentially shortfall penalties, potential ramifications for the reputation of the Company with Inland Revenue etc The Officials Issues Paper Making tax simpler - Better business tax includes an example (4B replicated below, emphasis added) which implies there will be no adverse implications for taxpayers of underpaying at the final provisional tax instalment date if the taxpayer uses the uplift method, for example late payment penalties, being chased by Inland Revenue for unpaid tax or having payments or refunds relating to other taxes applied against a perceived short payment of provisional tax. However the Group submits this needs to be completely clear within legislation and also other explanatory materials if this is the case. Example 4: Thunderbolt Limited (Thunderbolt) a manufacturer of clapping devices for sports fans, has residual income tax of $250,000 in the 2016 year. Thunderbolt has trouble estimating its provisional tax due to volatility in its income. Sales volumes are highly dependent on the success of local sports teams the more successful the teams, the more clapping devices are sold. Therefore Thunderbolt decides to use the standard method to calculate its provisional tax payments, reducing the risk of use of money interest applying if it estimates and the estimate is incorrect. For the 2017 year Thunderbolt makes two provisional tax payments of $87,500 per payment. At the third instalment date Thunderbolt has calculated that its actual annual liability is $300,000, due to the success of the local football team, the Fords. Thunderbolt could now either pay a third instalment of $87,500 or pay the full year balance of $125,000. If Thunderbolt pays the full $125,000 it will have satisfied its income tax obligation for the year and will not be subject to any use of money interest. If Thunderbolt pays $87,500, it will incur use of money interest on the shortfall of $37,500 from the third instalment date until the outstanding tax and interest is paid. Example 4B: Returning to the Thunderbolt example, but assuming the Fords have a poor season, resulting in Thunderbolt s residual income tax for the 2017 year

13 Page 13 of 29 being $230,000. Thunderbolt could pay the final instalment of $87,500 and be paid use of money interest from the third instalment date until the amount was refunded, or it could make a final payment of $55,000 with no use of money implications. Base protection measures for changes to UOMI standard uplift There are two base protection measures included in section 120KB. To be eligible for the new UOMI calculation method: - all associated persons must use the standard uplift method (or the GST ratio method) to calculate provisional tax; and - there must be no provisional tax interest avoidance arrangement (A provisional tax interest avoidance arrangement is where one or more amounts of residual income tax have been manipulated with the purpose or effect of defeating the intent and application of the UOMI rules) The Bill includes a provision (s 120KBB) that would require all standard method associates of a particular taxpayer to use the same provisional tax method for the tax year. Standard method associate is defined in clause 109 of the Bill: standard method associate means, for a person (person A), (i) if person A is a company, another company in the same whollyowned group of companies as person A: (ii) if person A is a company, another person that is associated with person A under section YB 3 of the Income Tax Act 2007, treating section YB 3 as requiring 50% voting interests and market value interests instead of 25%: (iii) if person A is not a company or is a company acting as a trustee, another person that is associated with person A, treating section YB 3 of the Income Tax Act 2007 as requiring 50% voting interests and market value interests, instead of 25% In the Group s view, only companies within a wholly-owned group should be limited to using the same provisional tax method, therefore the Group is supportive of section 120KBB as the association test in section YB 3 relates only to association between companies and non-companies The Group has concerns in respect over the scope of the requirement that there must not be a provisional tax interest avoidance arrangement and the uncertainty that such a provision can create. Inland Revenue should publish in a Tax Information bulletin clear guidance on what will constitute a provisional tax interest avoidance arrangement and include illustrative examples to assist taxpayers in determining what is permissible and impermissible behaviour. Changes to UOMI safe harbour threshold Section 120KE of the Tax Administration Act 1994 currently allows individual taxpayers a safe harbour from the imposition of use-of-money interest when the taxpayer has residual income tax of less than $50,000. The proposed amendment increases this threshold to

14 Page 14 of 29 $60,000 and also removes the requirement that a taxpayer be a natural person (an individual) to apply the safe harbour. The amendments will apply from the beginning of the income year The Group supports this proposal and recommends that it is reviewed again at regular intervals to ensure the threshold remains appropriate. The rule should also be reviewed when there are legislative changes which may move more taxpayers into the provisional tax regime (e.g. under anticipated changes to the taxation of employee share schemes). 4. Allowing contractors to elect their own withholding rate The proposed amendment will allow contractors who are subject to the schedular payment rules to elect their own withholding rate without having to apply to Inland Revenue for a special tax code. It is also proposed that contractors who are not covered by the schedular payment rules will be able to opt into those rules with the consent of the payer. The proposed amendment will come into force on 1 April The Group is supportive of contractors currently in the schedular payment withholding rules being able to elect their own withholding rates. However, in the Group s view, there needs to be some limitations on this so that the withholders do not bear excessive compliance costs. Compared to existing settings, firms hiring multiple contractors could be unduly impacted by these proposals, particularly where each contractor has a different withholding rate and has the ability to change their withholding rate through the year. This is because significant compliance costs can arise for businesses whose systems are not designed for a change in withholding rate from the default, or for multiple changes in a withholding rate during the year. 4.2 The commentary to the Bill proposes that: if a contractor has changed their rate twice in a 12-month period, they require the consent of the payer to [sic] any further changes. 4.3 The Group is supportive of this requirement, however we believe that this should apply if the contractor has already changed their withholding rate one time in the 12 month period (as opposed to two times). In the Group s view, this would provide a better balance between the positive benefits of enabling contractors to elect their own withholding rates and the compliance costs incurred by businesses when a contractor elects to change their withholding rate. 4.4 The Group further submits that these rules should be reviewed two years after implementation to gauge the impact on compliance costs for payers of schedular payments.

15 Page 15 of 29 Ability to opt into the scheduler payment rules 4.5 The Group is supportive of the amendment to allow contractors to elect into the schedular payment rules. The Group believes that giving contractors more avenues to manage their tax obligations is a positive step. 4.6 We note that the caveat to this proposal, being by agreement of the payer, is an important one, given the compliance costs that could arise for businesses paying contractors. Our support for this proposal is contingent on that caveat remaining. Reform of the withholding tax rules general comments 4.7 As part of Business Transformation, the Group understands that the withholding tax proposals in this Bill are only the first step on a journey towards modernising the withholding tax rules. The Group wishes to take the opportunity in this submission to provide our views more generally on reforms in this area. 4.8 This Bill has seen the introduction of withholding tax onto labour-hire firms, and it is possible the scope of withholding tax could be extended to other types of contractors in the future. The Group understands the overall move towards greater use of withholding taxes, as they can assist in ensuring compliance of taxpayers who otherwise may not comply and can provide Inland Revenue with very useful information. However we do not believe that the best approach to withholding taxes is to continue to add categories of taxpayers on an ad-hoc basis. 4.9 In the Group s view, if Officials want to expand the scope of withholding taxes, then a more fundamental review and inquiry is required to determine what the overall withholding tax framework should look like. Following this review of the withholding tax rules, reforms could then put forward in a discussion document. This would also provide the opportunity to consider whether current withholding rates are appropriate, in particular the non-declaration rate of 45%, which we do not believe there is sufficient justification for. 5. Extending withholding to labour-hire firm contractors The proposed amendment extends the schedular payment rules to contractors that work for labour-hire firms. The proposed amendment will come into force on 1 April In the Group s view more detail needs to be included with regards to the proposal to extend withholding to labour-hire firm contractors. A labour hire firm is defined as: an entity which has as one of its main activities the business of arranging for a person to perform work or services directly for clients of the entity. The Group does not consider that this definition is detailed enough to provide any certainty for taxpayers, in particular with regards to when provision of labour is considered to be a main activity and when work is performed directly for a client.

16 Page 16 of For example, taxpayer may provide accounting services to clients, however some aspects of the taxpayer s business may include engaging contractors for client services such as catering at events. The Group is concerned that if one aspect of a taxpayer s business is involved in labour-hire, this may result in the entire business being considered a labour-hire firm. This would then impose the labour-hire obligations over a wide range of potential contractors in other areas of the business. The Group believes that further clarification is needed in this area and submits that further detail needs to be included as to how this proposed rule is intended to apply. 6. Incremental Late payment penalties The proposed amendment specifies that Inland Revenue will no longer impose a 1% monthly incremental late payment penalty on unpaid tax from Goods and Services Tax (GST), income tax and Working for Families tax credits overpayment. This amendment states that this will only apply to future tax periods. The amendment will come into force on 1 April The Group is supportive of the proposed reform and sees this as a positive step forward. 7. Disclosing reportable unpaid tax to credit reporting agencies The proposed amendment to the tax secrecy rules will allow the Commissioner to disclose a taxpayer s information and their significant tax debt to approved credit reporting agencies. The amendments will apply from 1 April The Group is broadly supportive of these proposals. We agree that persons looking to transact or engage with a taxpayer with significant tax debt should be able to enter those arrangements with their eyes open and aware of the financial position of the taxpayer. 7.2 In the Group s view it is critical that there are sufficient safeguards to ensure that misinformation is not reported to credit agencies. This includes having systems in place to ensure that: a taxpayer is truly in default; the correct information is provided to the agency about that taxpayer; sufficient information is provided to allow those actually using the information to make an informed decision. In this regard we are supportive of the Commissioner providing details regarding the amount outstanding. This will ensure a misleading picture is not portrayed; once a debt is paid the credit agencies are notified of this. 7.3 The commentary to the Bill provides that these proposals will be phased in and the Commissioner will only credit report approximately 500 taxpayers per year until

17 Page 17 of 29 robust processes can be established. In the Group s view, no taxpayers should be reported on until such policies are established. There are two key reasons for this: Reporting on taxpayers when there aren t robust policies in places increases the risk of errors. Incorrect reporting could do irreparable harm to a taxpayer s business; and The absence of reported tax debt for an entity could give those running credit reports the false impression that there is no outstanding tax debt, when this may not be the case. 7.4 Finally, in our view the legislation relating to these proposals is unclear and does not necessarily align with the description of the proposals included in the Commentary. In particular, the legislation does not appear to explicitly require the Commissioner to disclose the amount of debt owing, despite the Commentary to the Bill suggesting this will occur. We submit that the relevant legislative provisions be reviewed by Officials to confirm their accuracy and consider how they can provide greater clarity. 8. Information sharing with the Registrar of Companies Amendments to the tax secrecy rules are proposed to enable Inland Revenue to share information with the Registrar of Companies, for the purpose of enforcing certain serious offences against the Companies Act The amendments will apply from 1 April The Group does not have an issue with this particular proposal but we provide comment regarding the sharing of information between Inland Revenue and other Government departments. 8.2 The Group has some concerns regarding greater information sharing between Inland Revenue and other government departments given the wide powers Inland Revenue has to request information and the breadth of commercially sensitive information it is able to obtain. One key concern is that given that there is a lower threshold for Inland Revenue to collect information compared to other Government agencies, there is a risk that Inland Revenue s information gathering powers are leveraged by other Government departments. In the Group s view, it would be inappropriate for other Government departments to utilise Inland Revenue s information gathering powers for these purposes. Information should only be made available to other government departments if they could have obtained that information under their own information gathering powers. 8.3 In the Group s view, Inland Revenue needs to consider developing an overall principle / framework for sharing of information with Government departments, rather than developing policy on an ad hoc basis. With these incremental reforms (including the credit reporting of tax debt included within this Bill), the Group is concerned that there is no clear destination as to where information sharing between Inland Revenue and other Government departments is ultimately heading. While we do not have any issue with these particular reforms, the trend towards greater sharing of information could lead to a point in the future where the Group has fundamental concerns with a particular ad hoc proposal. The current balance to Inland Revenue s extensive

18 Page 18 of 29 information collection powers is the purpose for which that information is collected (the carrying into force of the Revenue Acts) and the requirement on Inland Revenue to maintain the secrecy of this information. If the secrecy of this information is to be too far eroded it becomes necessary to assess whether the appropriate balance exists between the powers afforded Inland Revenue and the safe guards on the information obtained. Progressive incremental change without an overarching framework puts at risk the balance of the powers of the State to coerce information and the individual freedoms of a person from undue interference from the state. 8.4 The lack of an overall principle / framework makes it difficult for the Group and other stakeholders to provide informed feedback from a private sector perspective on this issue, and it is difficult for the Group to determine whether to lend our support to greater information sharing between Inland Revenue and other Government departments. We would welcome further discussions with Inland Revenue on a proposed principle / framework for information sharing. 9. Increased threshold for taxpayer self-correction of minor errors The proposed amendment increases the self-correction threshold for minor errors from $500 to $1,000. This will allow taxpayers to correct simple errors of up to $1,000 in their next tax return. The proposed amendment will come into force on 1 April The Group supports this proposal and considers it to be a move in the right direction. However the threshold is far too low to be of practical benefit to medium and larger taxpayers. In the Group s view, the threshold needs to be set a lot higher given the compliance costs incurred by larger businesses in making an adjustment in a previous period. 9.2 Presently to correct an error the taxpayer must make a request to Inland Revenue, which in many cases will need to be in writing. The Commissioner must then decide whether she is willing to deploy her resources to correct that error. In the Group s view, a more generous self-correction mechanism is consistent with the goals of Inland Revenue s Business Transformation programme as it would minimise compliance costs for taxpayers and would reduce the strain on Inland Revenue s resources. 9.3 The tax system currently relies on taxpayers to make a self-assessment of their annual income. It seems absurd that taxpayers aren t easily able to correct errors when they are discovered. We note that, while not technically correct, for noncontentious issues many taxpayers will already be self-correcting errors in subsequent periods simply because it is much easier. While not in the correct period, this ensures the correct amount of tax is paid. In the Group s view, Inland Revenue should consider near enough, to be good enough. 9.4 We submit that the proposed amendment to increase the threshold for taxpayer selfcorrection of minor errors to allow: Self-correction of errors based on the greater of a percentage threshold (i.e. 1% of the total tax due for that period); or