Tax administration for the 21 st century: a policy vision DRAFT: WORK IN PROGRESS

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1 Note: the yellow highlight in this document is in the original document Tax administration for the 21 st century: a policy vision DRAFT: WORK IN PROGRESS A government green paper Hon Todd McClay Minister of Revenue

2 First published in [Month] 2015 by Policy and Strategy, Inland Revenue, PO Box 2198, Wellington, Tax administration for the 21st century: a policy vision a government green paper. ISBN xxx-x-xxx-xxxxx-xx

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4 CONTENTS CHAPTER 1 CHAPTER 2 CHAPTER 3 CHAPTER 4 Background Introduction New Zealand s tax bases Inland Revenue s administrative framework Inland Revenue s business transformation programme How to make a submission Key questions for submitters The policy vision Key benefits arising Attributes of a tax administration fit for the 21 st century A policy vision to underpin business transformation - Key assumptions - Policy objectives and considerations Overall objectives Main elements of the policy vision Key questions for submitters on the policy vision The policy and legislative framework for tax administration Role of parliament Role of the taxpaye Role of the Commissioner of Inland Revenue Information and secrecy - The secrecy rules - Information sharing - Issues to consider Penalties, disputes and binding rulings Record keeping and time limits Legislative structure Key questions for submitters on the policy and legislative framework for tax administration Employment income Collection of PAYE information - Current problems - Potential changes Modernising of the PAYE rules more generally - Current problems - Potential changes Enhancing witholding taxes to cover 'employment-like' income - Current problems

5 - Potential changes Key questions for submitters on employment income CHAPTER 5 CHAPTER 6 CHAPTER 7 CHAPTER 8 CHAPTER 9 Withholding taxes on capital income Current problems Potential changes - Objectives - Likely scope of review Key questions for submitters on withholding taxes on capital income Individuals Background Current problems Potential changes - Objectives - Initial option for consultation Conceptual views of individuals income tax in the future Key questions for submitters on individuals Business tax Overall objectives Provisional tax - Current problems - Objectives - Initial options for consideration Micro and small businesses - Current problems - Objectives - Initial option for consideration Provision of information - Current problems - Objectives - Potential changes Key questions for submitters on business tax Social policy Current problems Objectives Likely scope of review Key questions for submitters on social policy Next steps Indicative timelines

6 MINISTERIAL PREFACE The Government aims to lift New Zealand s economic performance with careful economic management and by encouraging investment. And a nation s tax system is a part of that equation. New Zealand has a very good tax system, and that is something to be proud of. A good tax system ensures that a Government has the revenue it needs to keep providing the services that citizens require even during tight fiscal conditions. In fact, it is my view that our tax system has contributed to New Zealand s solid economic performance following the Global Financial Crisis. Efficient and fair revenue collection seeks to minimise compliance costs on taxpayers and businesses and reduces the need for borrowing which is good for the economy. Our tax system is valuable in other ways too. Today, Inland Revenue is the government department that New Zealanders deal with most often. The department no longer handles just tax collection. It also has responsibility for administrating child support, student loans repayments, Working for Families and KiwiSaver. Whether the tax system benefits you indirectly through taxpayer-funded services or through its contribution to the economy, or you benefit directly through social policies such as Working for Families, today s tax system is a part of all of our lives and we all benefit from its smooth running. To keep it running smoothly and provide the services that the citizens of a developed nation expect, we need the tax system to keep pace with the needs and expectations of the community. Inland Revenue is transforming its business to provide better value for money across the vast range of activities it performs and in line with Government s expectations for the public service. This will change the way that taxpayers interact with Inland Revenue and the wider Government. We all have a stake in its efficient function, so it s important that we all consider for ourselves what kind of tax administration we want. This Green Paper sets out the Government s initial thinking about the future of our tax administration system, and the policy settings that underpin and frame it. We want your feedback on whether this policy vision is heading in the right direction, before more detailed work is developed further. I urge you to examine the ideas in this paper and consider how it may affect you and the community you are a part of. It s important for all New Zealanders to have their say because this is an opportunity to help set the priorities for change, and shape the way we administer the tax system. I look forward to hearing your views.

7 CHAPTER 1 Background Introduction 1.1 Inland Revenue is responsible for the collection of over 80% of core Crown revenue for Government. It also has an important role in administering social policy programmes, including Working for Families tax credits, student loans, child support, paid parental leave and KiwiSaver. 1.2 Government has a responsibility to all New Zealanders to be efficient in the collection of tax revenues and the distribution of entitlements. This is reflected in Inland Revenue s mission statement, to contribute to the economic and social wellbeing of New Zealand by collecting and distributing money. 1.3 IR for the Future 1, Inland Revenue s strategic vision document, also describes what Inland Revenue wants to achieve for New Zealanders and how it will deliver on government priorities and contribute to more joined-up public services. Its vision is to be a world-class revenue organisation, recognised for service and excellence. This means it must: be agile, effective and efficient (for example, by reducing administration costs); enable taxpayers, wherever possible, to self-manage with speed and certainty 2 (for example, by reducing compliance costs); enable the Government to make timely and cost-effective policy changes; and work with other government agencies to more efficiently deliver services. 1.4 Success is ultimately reflected in two key outcomes: revenue is available to fund government programmes through people meeting payment obligations of their own accord; and people receive payments they are entitled to in a timely manner, enabling them to participate in society. New Zealand s tax bases 1.5 The aim is to tax as broad a range of income and expenditure as practicable at rates that are as low as possible (known as the broad-base, low-rate or BBLR approach). This provides a robust revenue base and promotes fairness, economic efficiency and revenue integrity, and helps keep administration and [To footnote a definition of what we mean by certainty in the context of this paper] 1

8 compliance costs low. It is a much more coherent way of levying tax compared with most OECD countries. 1.6 The following charts show the composition of tax revenues in New Zealand, together with an overview of how this compares internationally with other OECD countries. They highlight that New Zealand s three main tax bases (personal tax, company tax and GST) all have broad coverage, allowing substantial amounts of tax to be collected at relatively modest tax rates. To insert revised table detailing composition of tax revenue/receipts by tax type updated figures provided in tax outturn data released by Treasury on 7 October See Composition of tax revenue - year ended June 2014 Excises taxes and FBT duties 5% 1% Other 3% Goods and services tax 32% Resident withholding tax 3% Non-resident withholding tax 1% Company income tax 15% Individual income tax 40% Also, to insert latest chart of OECD comparisons of main headline tax rates (GST, individual, company), together with associated %s of GDP. Include recent example of NZ s competitiveness e.g. efficiency ranking.] 2

9 Inland Revenue s administrative framework 1.7 The New Zealand tax system relies on voluntary compliance. The Tax Administration Act 1994 sets out certain obligations that are imposed on taxpayers and on Inland Revenue. The key obligations for taxpayers are to: self-assess their income; file returns where appropriate; and pay tax due. 1.8 The Commissioner of Inland Revenue has the ability to amend an assessment, including issuing default assessments. The self-assessment model underpins a number of Inland Revenue s interactions with taxpayers for example, the binding rulings and determinations regimes and the disputes process. 1.9 The Tax Administration Act also sets out a range of rules which relate to the administration of the tax system, including: return filing; record keeping; disputes; payments; withholding; penalties; recovery powers; and relief and remission powers Inland Revenue aims to make it as easy as possible for people to comply with the tax system and to access their social policy entitlements delivered through the tax system. It also aims to make it hard for people not to comply. The goal is to provide services that are value for money while maintaining the integrity of the tax system The way that Inland Revenue operates largely reflects a set of decisions on how to make marginal improvements or take on new tasks given the legacy of the systems that are already in place. The government has not stood back and had a fundamental look at how tax might best be administered if it were starting from scratch. Inland Revenue s business transformation programme 1.12 Inland Revenue is embarking on a once-in-a-generation opportunity to simplify New Zealand s tax system to meet 21st century needs. Government has agreed in principle to a long-term business transformation programme to look at different ways of delivering tax and social policy. This includes re-shaping the 3

10 way Inland Revenue works with taxpayers, and looking at possible changes to, amongst other pieces of legislation, the Tax Administration Act The world is changing, with huge improvements in ways of doing business. Ways of doing business that were acceptable 10 or 20 years ago will no longer meet the demands of taxpayers as Inland Revenue moves further into the 21 st century It is therefore vital that Government and Inland Revenue establish the sort of tax administration services that taxpayers and users of social policy services provided by Inland Revenue actually want In June 2014 in conjunction with the Treasury and Victoria University, Inland Revenue hosted a tax conference entitled, Tax Administration for the 21st century. 3 This represented an initial step in the process of establishing taxpayers views and perspectives In particular, the conference s main purpose was to explore, from a policy perspective, potential ways of making tax easier (by reducing both compliance and administration costs) without sacrificing other tax policy objectives such as raising revenue and ensuring fairness and efficiency The main focus of views proffered by stakeholders at the conference were in relation to: The ability to self-manage taxpayer affairs with more speed, certainty and predictability, together with access to the right people at the right time with the necessary skills to provide certainty to taxpayers. In other words, Inland Revenue should move away from focusing on more routine activities and instead concentrate on high-value services to taxpayers to enable them to manage their affairs with certainty instead. The need to consider policy and legislative settings (and not merely current business processes) to rethink how tax administration can be improved. It is more than just digitalising existing processes and replacing an aging information technology system. Anything within the tax administration system should be up for consideration. The need for New Zealanders, businesses and their advisors to be involved in the design of the rules and processes that underpin tax administration. The tax administration system has to work for these groups. The cost of change needs to be closely considered and managed to ensure that it is not merely shifting costs from Inland Revenue to taxpayers or vice versa. There has to be an overall net-benefit to society through a real reduction of compliance and administrative costs. Ensuring that there is continued maintenance of the tax system whilst tax administration modernisation is being undertaken

11 1.18 As part of the conference, Inland Revenue officials produced a draft working paper that outlined, at a very high level, a vision of some specific policy changes that could form part of Inland Revenue s business transformation programme. The issuance of this green paper is the next step in taking that policy vision, and its constituent parts, a step further in order to test its underlying assumptions It is recognised that many of the opportunities for improvement will be best known by taxpayers, their advisors and the wider business community. To that end, this green paper formally establishes the start of the consultation process on how to best undertake the process of transforming New Zealand s tax administration services. How to make a submission 1.20 The Government invites submissions on whether the proposed policy vision would likely achieve intended outcomes for taxpayers. Although the elements of this vision are in the early stages of development, and will be subject to their own consultation processes over the coming years, stakeholders are none the less asked to test whether the assumed direction of travel [and timing] of the vision is valid or not and to identify any errors and/or omissions of scope Submissions should be addressed to: Tax Administration for the 21 st Century C/- Deputy Commissioner, Policy and Strategy Inland Revenue Department PO Box 2198 Wellington 6140 Or policy.webmaster@ird.govt.nz with Tax Administration for the 21 st Century in the subject line. Electronic submissions are encouraged. The closing date for submissions is [xxxxx] [TO INSERT SECTION ON AVAILABILITY OF ONLINE CONSULTATION, INSERT LINK ETC ETC] Submissions may be the subject of a request under the Official Information Act 1982, which may result in their release. The withholding of particular submissions, or parts thereof, on the grounds of privacy, or commercial sensitivity, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider that there is any part of it that should properly be withheld under the Act should clearly indicate this. [TO ENSURE THIS WORDING IS STILL CONSISTENT WITH NEW OIA PROCESS] 5

12 Key questions for submitters 1. [To formulate once paper finalised and discussed with Ministers etc.]

13 CHAPTER 2 The policy vision Key benefits arising 2.1 For individual taxpayers, it is envisaged that in the future: Taxpayers are able to quickly and easily satisfy their tax obligations digitally. Inland Revenue pre-populates online income tax returns and, for the majority of individuals, self-assessment represents confirming income sources. For individuals with income sources that can t be pre-populated, this is the only additional information required from taxpayers. Refunds are made quickly and, in most cases, automatically (based on better use of data and analytics). Any outstanding tax debts are simply recovered proactively through automatic withholding from existing income sources. 2.2 For businesses, key benefits arising from policy and business transformation change will include: Tax compliance costs being greatly reduced, in particular for small and medium enterprises. Providing speed and predictability to businesses in their tax affairs. A two-way transfer of information between business s own systems (e.g. payroll) and Inland Revenue, meaning that tax compliance obligations are being met as part of a business s normal processes. Simplified calculations for provisional tax ones that are more based on real time information (for example when using approved accounting software) together with payment options that better reflect taxpayers cash flows. 2.3 From a social policy perspective, the intention is to design a system that works for the customer and is fit for purpose. It should have many of the advantages that individual taxpayers will receive, such as pre-population of information Inland Revenue already holds. It should also match the timeliness of payments to the need to receive (or ability to pay) on a more real-time basis, providing an increased level of certainty for individuals and families. 2.4 The vision contained in this green paper outlines, at a high level, some of the policy areas of tax administration that will need to be examined to ensure these benefits are in fact realised. The paper indicates the key areas where change will be required to frame and enable Inland Revenue s business transformation 7

14 programme. It is an opportunity for stakeholders to provide initial feedback on the likely direction of the changes that will follow over the following years. Attributes of a tax administration system fit for the 21 st century 2.5 A key part of Inland Revenue s on-going challenge is to provide excellent service. This should also be an integral part of the government s business transformation programme objectives. 2.6 To transform the way things are done, and in order to ensure that any changes are focussed on taxpayers needs, some of the broad features that Inland Revenue s future business should include are: providing speed and predictability for taxpayers and the private sector; inclusion of efficient self-management options for taxpayers (including comprehensive use of digital channels); increased compliance, with Inland Revenue and taxpayers focussing more effort on building compliance right from the start; Inland Revenue s interventions being more focussed on long term compliance improvements, by encouraging sustainable behaviour changes of Inland Revenue and taxpayers, together with improved systems; proper targeting to different taxpayers needs; more automation and streamlined information flows; greater use of taxpayers own processes and software; assisting taxpayers to get their requirements right from the start; a broader approach to compliance based on smarter use of information and a wider range of effective interventions; a range of different working relationships with other organisations, including strategic partnerships to deliver some services; where appropriate, less direct contact with taxpayers; and greater use of commercial IT products in systems and services. 2.7 In short, Inland Revenue s tax and social policy systems should be simple and make it easy to get right and hard to get wrong, be quick and low effort to use, provide certainty, and should not require duplication of effort by taxpayers or associated third parties. The systems should help taxpayers build effective compliance right from the start. They must also be flexible enough to move with technology developments. 2.8 This will not be an easy shift to make, or a quick one, but it is absolutely necessary to make such changes. 2.9 The current revenue system is under increasing pressure. Major tax and social policy initiatives are difficult to implement given core technology and business processes. These demands have resulted in various system modifications, 8

15 manual interventions and workarounds that have produced layers of complexity for government and taxpayers As a result, current systems and processes pose significant challenges and risks. These include: operational failure, potentially impacting the Government s revenue collection and distribution; ability to implement the Government s tax and social policy initiatives in a timely and efficient manner; inability to provide the services that taxpayers and their advisors are and will increasingly demand in a future digital age; inability to fully support the delivery of business initiatives across the wider public sector; and inability to benefit fully from information and expertise used across the wider public sector. A policy vision to underpin business transformation 2.11 A good tax system requires both good tax policy and good tax administration. Both are pre-requisites for a tax system to operate to its full potential. This green paper provides a policy vision outlining some of the changes that could be made or required to frame and enable Inland Revenue s business transformation programme and improve tax administration. Key assumptions 2.12 Some key assumptions have been made during the early development of the policy issues that are likely to underpin Inland Revenue s business transformation. These include: Key tax bases will remain substantially in place for example, there are no fundamental changes currently planned to either income tax (individuals and corporates) or GST. Previous comprehensive tax reviews, most recently by the 2009 Tax Working Group 4, provide a high degree of support for this assumption. Social policy and other non-tax functions currently administered by Inland Revenue (for example, in relation to Working for Families, child support, student loans and KiwiSaver) will continue to be a key part of Inland Revenue s portfolio of work. Policy objectives and considerations Broad-base low-rate tax settings and other core tax policy considerations 2.13 As noted, New Zealand s tax and social policy system is starting from a good place. In addition to its tax bases, New Zealand s also has several fundamental tax policy settings that do not need to be materially reconsidered at this time

16 2.14 For example, New Zealand s broad-base low-rate (BBLR) framework is a major reason for its effective tax policy. BBLR ensures that as broad a range of income and expenditure as practicable is taxed at rates that are as low as possible. This allows for a robust way of collecting necessary levels of revenue without high and very distorting tax rates Taxes are necessary to provide the revenue to finance the level of government services that New Zealanders expect. There are, however, additional costs over and above the direct cost of the revenue raised. There will be costs to Inland Revenue in administering the tax system and costs to taxpayers and their advisers in complying with the tax system Further, there will also be distortionary costs because taxes can encourage people to do things that would not be sensible in the absence of tax. For example, a tax break for one type of business activity will subsidise this activity and attract resources to it that would not exist absent the tax break this tends to lower overall productivity A BBLR system helps keep administration and compliance costs low, and reduces economic distortions to a minimum. It also promotes fairness as it is generally more difficult to structure around Given that our BBLR system provides such a coherent and understandable way of framing a tax system, there will be a large onus of proof to overturn before making any policy changes that are inconsistent with existing BBLR settings In addition, any proposed outcomes will still, of course, also need to have regard for the usual elements and trade-offs that are inherently considered as part of any tax policy change. Factors such as efficiency and growth (including compliance and administrative costs noted above), equity (recognising other economic and social objectives), fairness and coherence, together with applicable revenue and fiscal impacts, will also need to be carefully taken into account when assessing options In summary, New Zealand s tax settings are in a good place they are an asset that should be protected. This policy vision provides an opportunity to invest in this asset by ensuring that our tax administration system is fit for purpose for the future. Compliance costs 2.21 As part of the trade-offs considered in any changes, it is crucial not to fall into the trap or merely shifting costs away from government onto taxpayers. Reforms will not be successful if they cut administration costs but merely replace these with additional compliance costs on the private sector. If that was to occur the total costs for the country as a whole would increase Further, although it is likely that New Zealand has low compliance costs by international standards, given the large number of small and medium sized enterprises (SMEs) in New Zealand that sector is likely to bear a large proportion of overall compliance costs. 10

17 2.23 [ONCE IT IS COMPLETED, LINK INTO NEW COMPLIANCE COSTS ON SMEs CURRENTLY BEING UNDERTAKEN] 2.24 Given their size, and the fact that some tax compliance costs are fixed in nature, the distortionary costs of taxes on SMEs are likely to be significant (despite New Zealand s relatively attractive BBLR tax policy settings). As a result, cutting compliance costs on this group will be a priority This does not necessarily mean establishing a tax concessionary regime for SMEs, however, as tax costs and tax compliance costs are not the same. It may, however, be possible to make changes that result in tax simplification measures that reduce compliance costs for SMEs without too large a fiscal impact At the same time there are reasons to be wary of creating too much choice. Compliance costs tend to rise in countries that give SMEs too many options for paying tax because this can encourage SMEs to calculate their tax liability a number of ways to find which involves the lowest tax payments (perversely at the cost of increased compliance). Also, as much as possible, it is undesirable to have rules that create difficult boundaries and disincentives for successful firms increasing in size In addition to core policy changes, there will also be other opportunities for simplifying by more effective reliance on technology and existing business systems (for example, providing PAYE information more directly from payroll systems). Facilitating compliance 2.28 Effective tax systems rely on facilitating compliance by taxpayers. Rectifying non-compliance afterwards imposes significant costs on both Inland Revenue and the taxpayer. It is more effective and efficient to consider what can be done to facilitate compliance and enable taxpayers to file tax returns and make entitlement claims which are correct, i.e. to get it right from the start The elements of an approach that facilitates compliance include: designing a tax system which makes it easy to comply and difficult not to; directing attention to the pre-filing stage and proactively targeting high risk areas and segments; and where possible, incorporating tax and social policy processes within a taxpayer s everyday life that is, designing systems that align or build off the taxpayer s own processes and lifecycle To effectively facilitate compliance, Inland Revenue must continue to build its understanding of different groups of taxpayers and the factors that drive their behaviour (capability, motivation and opportunity). It can then design interventions that effectively influence behaviour. 11

18 Increased use of effective withholding regimes 2.31 International studies have found very high levels of compliance for certain forms of tax (in particular for withholding taxes, such as PAYE) and considerably lower rates of compliance for others, such as self-declared income. [USE A RESEARCH EXAMPLE HERE?]. This suggests that greater use of withholding schemes, wherever possible (and appropriate) should be encouraged The effectiveness of withholding at source is reflected in the fact that the current New Zealand tax administration system generally works well for individual taxpayers whose income is derived solely from salary and wages which are subject to tax withholding regimes. This is consistent with the experiences faced by other modern tax systems, and is also reflective of the reliance placed on businesses that operate the withholding in question The system works less well, however, in other circumstances in particular where tax on investment or other income is either not withheld or withheld at the incorrect rate. This can lead to costly square-ups when returns are filed, or unfairness and inefficiencies if they are not. This particular problem, if not addressed, is likely to grow with the onset of an ageing population where more people earn a larger proportion of their income from capital sources. [COMMENT ON HIDDEN ECONOMY / INTEGRITY] Filing obligations 2.34 The current obligations on individual taxpayers vary, based on historic and somewhat arbitrary distinctions A policy decision was made previously to try and remove the requirement to file income tax returns from as many individuals as possible. This resulted in very few salary and wage-earning individuals in New Zealand, relatively, filing income tax returns This created a tension in the tax administration system between taxpayers who are not required to file and those who are. As a taxpayer s circumstances change, their filing obligations can also change In addition, over time, significant numbers of individuals are now either required to file or are, in certain circumstances, given the option to do so in favourable circumstances Individuals earning foreign income, rental income or business income, or who are receiving Working for Families tax credits, are required to file tax returns. Others are not necessarily required to do so. These include some people who have interest or dividend income, or an extra pay or secondary earnings, on which tax may have been withheld at the wrong rate. [INSERT SUMMARY GRAPH OF FILERS/PTS OVER TIME (20 YEARS?), WITH POINTS IN TIME BEING PRE TAKING PEOPLE OUT SYSTEM, 12

19 WHEN CHANGES INTRODUCED, AND GENERAL INCREASE OVER TIME SINCE.] 2.39 These problems and constraints lead to questions about whether it is still desirable to keep as many individuals as possible away from actively dealing with the tax system. Could modern technology provide scope for a dramatic reduction in the costs of interacting with the tax system, and allow for an efficient squaring-up of refunds or liabilities at the year-end where required? 2.40 This paper will explore the possibility of whether Inland Revenue can provide more extensive prepopulated information on tax returns available to individual taxpayers. For those with simple affairs and without business, rental or foreign income, filling a tax return might be no more complex than confirming whether the sources of income that Inland Revenue identifies are the only sources of income A practical difficulty is in getting effective (near accurate) withholding rates in place, and minimising the costs involved in squaring up liabilities and refunds when tax has been withheld at rates that do not reflect the true end of year tax position. The trade-off with trying to make withholding tax more accurate is the potential increase in compliance costs for the withholder and administrative costs for Inland Revenue Again, technology may help this by making square ups much less costly. This paper will also be exploring whether it is possible to simplify square ups with automatic bank transfers to those who have paid too much and higher rates of future withholding on those who have paid too little. Automatic square ups could reduce pressure points around secondary tax, along with improvements to the rates at which secondary tax is withheld. Other issues 2.43 Other issues considered include problems relating to information flows. There are currently problems with the sufficiency and timeliness of collection of information, and the accuracy of that information When information is inaccurate there are also downstream problems with the timeliness of intervention or correction of that information Parallel questions arise around whether other features of the current tax system are really what taxpayers expect in the 21 st century. These include: the Employer Monthly Schedule and other withholding systems are they required to be updated to meet more modern standards; whether businesses, in particularly those with complex tax affairs, are afforded the right level of certainty to effectively manage their tax affairs in a timely and efficient manner; the way that businesses are required to pay tax, including the estimation of provisional tax; whether compliance with FBT can be simplified; and 13

20 the complex interactions between tax and social assistance. Overall objectives 2.46 Some of the more specific objectives that the policy vision in this paper, taken as a whole, should achieve include: Making it easier for taxpayers and others to pay tax and meet social policy obligations. Increasing predictability for taxpayers, by: o providing easy digital access to taxpayers accounts (and alternatives for those without such access); o providing earlier and simpler transactions; o providing effective and timely solutions to taxpayers pressing issues and problems (for example, when proving binding rulings); o access to the right information and people at the right time; o using a taxpayer s normal business processes and systems to meet tax obligations; o having a low cost of contact; o be designed for a digital world, not a paper world; o improving response times; and o improving the collection, accuracy and timeliness of information to simplify and better tailor interactions. Increasing the efficiency of debt collection. Reducing compliance and administration costs. Supporting broader all-of-government goals and providing value for money for the Government. Ensuring the on-going surety and integrity of the tax and social policy system. Making it easier and less expensive for taxpayers to get it right and meet their obligations (and harder for them to get it wrong). Providing sufficient information so that key policy concerns and audit risks can be identified easily. Providing flexibility to cater for future changes. Having a customer focus i.e. be simple to understand and easy to selfmanage. Main elements of the policy vision 2.47 This green paper formally establishes the consultation process on how best to undertake the process of transforming New Zealand s tax administration services. The initial policy vision contained in this green paper sets out at a 14

21 high level the main elements that might form part of that process over the coming years Feedback is therefore sought on whether the proposed policy vision would likely achieve intended outcomes for taxpayers. Elements of this vision are in the early stages of development, and will be subject to their own consultation processes over the coming years but, in the meantime, Government wants to test whether the initial proposals as a whole are coherent and to identify any errors or omissions of scope In doing so, it should be remembered that long term improvements to the administration of the tax system as described will only be possible after a number of fundamental initial pieces of work have been undertaken for example on streamlining the collection of information from PAYE and enhancements to other withholding regimes and moving to a digital environment The following diagram depicts the key elements (both pillars and building blocks) upon which the policy vision described in this green paper is based. The constituent parts of the vision being explored in more detail in the remainder of this paper. Review broader Tax Administration legislative and policy settings to support the Business Transformation programme Digital Services Entity / Product Rationalisation, where appropriate Social Assistance e.g. Review and streamline the delivery of social assistance products such as Working For Families Tax Credits Business Tax Obligations e.g. Review and streamline the collection of business taxes such as provisional tax; and integrating tax obligations into business processes Individuals Tax Obligations e.g. More pre-population of income resulting from improved collection of withholding tax information Other Withholding Tax Regimes such as Resident Withholding Tax e.g. streamline the collection of other withholding tax information integrating tax obligations into business processes PAYE e.g. streamline the collection of PAYE and related information integrating tax obligations into business processes time 15

22 Key questions for submitters on the policy vision 1. To formulate once paper finalised

23 CHAPTER 3 The policy and legislative framework for tax administration 3.1 Changes to the way that taxpayers interact with Inland Revenue provide an opportunity to investigate the fundamental issues contained within the primary legislative vehicle for tax administration, the Tax Administration Act (the TAA). 3.2 In considering specific enabling legislation that would be required for any particular change as part of Inland Revenue s business transformation programme, a policy review of key tax administration and legal issues that frame and underpin much of our tax administration system is needed. 3.3 This review will involve a consideration of: the roles of Parliament, the Commissioner, the taxpayer and third parties in tax administration; whether the Commissioner s current role is appropriately legislated for when considering the future tax administration environment; principles underpinning information and secrecy; the suitability of our penalties, disputes and binding rulings regimes in the future environment; record keeping and time bars in the future environment; and the legislative structure of the tax Acts. 3.4 A key part of the review will be considering the implications for the role of the Commissioner given the evolving role of chief executives in the public service. There are increasingly clear expectations on chief executives to support broader Government outcomes, alongside their responsibilities for their individual departments. 3.5 This paper does not seek to address these issues at this time, but rather raise awareness that these issues will be considered at an early stage in the business transformation programme. Role of Parliament 3.6 Parliament both guides and constrains the role of the Commissioner of Inland Revenue, and the relationship between the Commissioner and taxpayers. 3.7 The first point to note is that the power to levy tax belongs to Parliament alone. Parliament also prescribes the tax laws on what the Commissioner and the taxpayer must do to discharge their respective tax administration and tax compliance functions. 3.8 It is accepted that legislative prescription is necessary to ensure certainty in the rules and to retain a perception by taxpayers of impartiality by the 17

24 Commissioner. It is for Parliament to determine how much prescription (versus Commissioner administrative decision-making) is desirable for these purposes. Role of the taxpayer 3.9 Self-assessment is a feature of the current New Zealand tax administration rules, and provides an efficient basis for tax collection. An assessment involves both a determination of fact and the application of the law to the facts. Selfassessment reflects the fact that, traditionally, a taxpayer has the information and has often been in the best position to determine their own income and tax liability Self-assessment shapes the compliance and penalties legislation, dispute resolution procedures, binding rulings regime and other key features of the current tax administration framework In a world where assumptions about information collection and calculations are challenged, income tax returns are potentially pre-populated and calculated are made by Inland Revenue, the role of self-assessment needs to be considered It can be assumed that taxpayers will still be in the best position to verify the accuracy and completeness of their own income and personal circumstances. As such, even if the Commissioner has more information about a taxpayer and is able to provide a return in the first instance for the taxpayer s consideration, it is likely that a newly transformed tax administration will still encompass some notion of taxpayer self-assessment. This is because while the method by which taxpayer information is collected and conveyed and tax calculations made may give rise to much more efficiency in the tax system, not all taxpayer circumstances will be able to be dealt with by generic processes That said, it will be very important to test this assumption and carefully consider the full implications of any changes concerning the roles and obligations of taxpayers. This includes the points in time from which important obligations arise such as the crystallisation and determination of liability and the payment of tax There is less of a role for self-assessment in social policies, with entitlements or obligations usually determined by the Commissioner. However, the information required to do this is held by families and individuals. The interaction between the role of taxpayer self-assessment and the Commissioner in social policy administration will need to be considered When seeking to change the tax administration settings we need to ensure that the TAA remains usable, including ensuring that legislative reference points remain in place. 18

25 Role of third parties 3.16 The role of parties external to the Commissioner and taxpayer relationship, including persons that withhold tax, tax advisors and software developers/providers, will need to be reviewed as part of the shift to a transformed tax administration. Role of the Commissioner of Inland Revenue 3.17 A reality of modern tax administration is the Commissioner of Inland Revenue must operate the tax system with limited resources. As a result, the Commissioner s role cannot be to collect every last dollar of tax. Instead, the Commissioner s role is the care and management of the taxes which involves applying the Commissioner s resources to collect the highest net revenue over time While the Commissioner must follow the law as interpreted, some discretion or power is available to the Commissioner in specific areas so that the Commissioner can better ensure that the law works in practice The question to be considered as part of business transformation is whether the Commissioner should be provided with greater discretion or flexibility in decision-making to compensate either for any deficiencies in the current care and management provisions in the TAA or other specific provisions in the revenue acts Recent reforms to the State Sector Act and the Public Finance Act have extended the responsibilities of public sector chief executives to include the collective interests of government and improved financial flexibility to support innovation and joint agency delivery. These changes raise questions about how best to reconcile the role of the Commissioner with the responsibilities of chief executives. Information and secrecy 3.21 Inland Revenue is a highly information-driven government agency and has more interactions with New Zealanders than any other agency. Information flows and analytics will be increasingly critical to its ability to perform its core functions effectively in the future. Likewise, the ability of Inland Revenue to assist in improving the efficiency and effectiveness of government more widely, by working with other agencies and organisations, is dependent on timely and accurate information As Inland Revenue s business transformation programme is being developed, various key questions will need to be asked and considered. These include: Where will core information that is required come from (e.g. taxpayer, employers, financial institutions, other third parties)? What other information might Inland Revenue need to share, and with whom would it be shared? 19

26 To what extent should Inland Revenue collect information on behalf of other government agencies (that it can collect easily) that may not necessarily be required for tax or social policy purposes? The secrecy rules 3.23 The effective administration of the New Zealand tax system relies on the voluntary compliance of taxpayers. Critical to this compliance is taxpayers having trust in Inland Revenue that their information will not be disclosed inappropriately. However, to operate the tax system efficiently, Inland Revenue sometimes needs to disclose information to third parties when it is reasonable to do so. An appropriate balance is needed in situations when these principles are inconsistent Provisions protecting taxpayer confidentiality have been in place for over 100 years. The secrecy rules in section 81 of the TAA provide a strict rule of secrecy for Inland Revenue officers subject to a number of specific and general exemptions Other pieces of legislation are relevant to information collection, use and disclosure. The Privacy Act sets out information privacy principles, relating to the collection, use and disclosure of personal information, and contains specific frameworks for the sharing of personal information by government agencies. Information sharing 3.26 In 2013 new rules were put into place in the Privacy Act permitting and governing approved information sharing agreements (AISAs) between agencies delivering public services. A specific exception to the general secrecy rules allows Inland Revenue to share certain information under an AISA. This framework applies to personal information about an identifiable individual and does not cover all taxpayer-specific information held by Inland Revenue. A broader consideration of information sharing in the cross-agency setting, and if appropriate beyond, may therefore be warranted. Issues to consider 3.27 Inland Revenue s business transformation programme aims for the more effective use of information within Inland Revenue and greater cooperation across government to, where appropriate, increase efficiencies. These goals will involve consideration of how Inland Revenue obtains, uses and releases the information it holds, and whether the current legislative framework is fit for purpose A number of potential inconsistencies and tensions will therefore be considered as part of the on-going policy considerations, such as: the interplay between information sharing and tax secrecy, and any potential implications for the integrity of the tax system; 20

27 whether non-taxpayer-specific information (for example statistical information or organisational information) should be treated differently to taxpayer-specific information; whether information for social policy purposes (which relate to family circumstances) should be treated differently to individual s tax information; intelligence sharing and participation in cross-agency initiatives i.e. whether Inland Revenue should have the ability to collect more data than it strictly requires if associated information is required for wider government requirements (e.g. numbers of hours worked)? sharing of information both generally (with reference to the AISA framework), and in particular about non-individuals (i.e. those not covered by the AISA framework, such as businesses); potential co-location and joint service provision with other government agencies; the implications of greater provision of information via business accounting software and/or intermediaries; how to best source information that will enable Inland Revenue to identify and assist customers to get it right from the start ; and how to manage the collection and use of large external data sets. Penalties, disputes and binding rulings 3.29 The penalties, disputes and binding rulings regimes in the TAA will be subject to on-going review to ensure they are integrated with other business transformation initiatives. Timeframes, including the Commissioner s statutory time-bars, are a critical aspect of these regimes and are likely to come under close scrutiny as the transformation programme considers new approaches to the assessment function. Therefore, in addition to the wider issues discussed below for the penalties, disputes and binding rulings regimes, the appropriateness of the current timeframes for those regimes will need to be considered A review of the policy and legislative settings relating to penalties will be undertaken, with a primary view of encouraging voluntary compliance with the law. Options to consider as part of this penalties review include the following: reducing or removing current late payment penalty rates; replacing current penalties with a general interest charge (or looking at the split between penalty and interest components); extending the Commissioner s ability to write off penalty debt in certain circumstances; providing more flexibility in the ability of Inland Revenue to issue default assessments; changes to terminal tax dates; determining when it is appropriate to withhold refunds; 21

28 providing incentives to compliant debtors and those with systems likely to lead to higher levels of compliance; and considering new ways to engender greater compliance Disputes between taxpayers and the Commissioner are at times inevitable. It is important that our disputes process remains viable in the transformed administration. This could involve ensuring that the process caters for smaller taxpayers as well as large ones and removing undue complexities in the system The binding rulings regime is intended to give certainty to complex transactions when requested by the taxpayer. However, it is important that all taxpayers are given an appropriate level of predictability when conducting their business and tax affairs The Commissioner s interpretation statements and views on the application of the law are relied on by taxpayers (in particular smaller taxpayers) and their agents. The key issue is whether there are sufficient avenues that provide smaller taxpayers with more certainty without imposing significant administrative costs or revenue risks on the government. Record keeping and time limits 3.34 Record keeping rules have an important revenue integrity role to play. However, maintaining the proper records can be costly for taxpayers, especially small taxpayers (although the cost of online storage has reduced in recent years). It is therefore important that the right balance, both in terms of the nature of the records to be kept and the length of time they are to be kept, is achieved The seven-year record retention period has applied since 1992; it is reduced to 12 months after the end of the income year for a non-filing taxpayer. This setting and the nature of records required to be kept will be reviewed to reflect an environment where the taxpayer may not be the principal source of information Matching the record keeping period with the statutory time bar may reduce compliance costs. If a shorter retention period is considered we may also need to consider whether the Commissioner should in any circumstances have discretion to require taxpayers to retain records for a longer period. Record keeping changes must be consistent with wider non-tax record keeping regulations A review of the time bar rules could similarly investigate the appropriate general time bar for the transformed tax administration as well as circumstances in which the general time bar ought to be extended. Either way, the time bar should be considered in the context of modern approaches to audit and information gathering functions. 22