Simplification, Compliance Cost Reduction -- Major Themes Of Tax Legislation Year

Commerce and Associate Revenue Minister Paul Swain says 2001 has seen the introduction of a large number of legislative measures designed to simplify the tax system and reduce the compliance costs associated with paying tax.

He says the tax bill before Parliament contains several measures aimed at simplifying tax for small businesses.

“They are small but practical measures that can make a difference,” Paul Swain said.

“They range from removing the requirement for small businesses to value and make adjustments for small amounts of trading stock at the end of the year, to raising the threshold under which individuals who are provisional taxpayers risk having to pay use-of-money interest.

"Other measures in the same bill are aimed at simplification and compliance cost reduction for business generally.

“They include clarifying the law about the tax treatment of wage-related provisions when a business is sold and employees are transferred.

"Changes already enacted this year include clarifying and simplifying the general interest deductibility rules for companies, and introducing greater certainty into the tax laws relating to research and development expenditure, thus reducing compliance costs.

"Projects under way include further small business measures such as developing an option for businesses to pay tax as they earn income, rather than in three equal payments throughout the year, as they must do now, and to reduce use-of-money interest costs.

"The Government is committed to continuous tax simplification and compliance cost reduction for business. There is, however, no single solution that will suit all businesses. Instead it is a matter of making incremental changes to the tax system that will make compliance easier for the many different kinds of taxpayer,” Paul Swain said.

See attached technical note for details of tax simplification and compliance cost reduction measures in 2001.
Government Tax Simplification and Compliance Cost Reduction Initiatives

More time for business proposals
In May of this year the Government released More time for business, a discussion document containing a number of proposals for reducing tax-related compliance costs, particularly in relation to small business.

A number of submissions were received on these and other proposals raised in the discussion document. The Government is legislating for a number of them in the Taxation (Relief, Refunds and Miscellaneous Provisions) Bill, introduced into the House on 3 December 2001:

Raising the use-of-money interest threshold
The threshold under which individuals who are provisional taxpayers are not subject to the use-of-money interest rules will be increased from $30,000 to $35,000 of residual income tax. This will reduce the risk of having to pay use-of-money interest for a greater number of provisional taxpayers.

Resident withholding tax
Interest payers will be given greater flexibility in how they communicate resident withholding tax (RWT) information to interest earners, including greater control over the format of RWT deduction certificates and how these certificates are to be provided. The new legislation will simplify the RWT information requirements for banks and other interest payers by allowing RWT information to be communicated through existing customer interfaces and electronic means.

The new legislation will also increase the threshold for providing an RWT deduction certificate from $20 to $50 of gross withholding income.

Imputation return requirements
Companies with credit balances in their imputation credit accounts will be allowed to have these amounts refunded once they have filed an imputation return for that imputation year. The new legislation will remove the requirement for multiple imputation returns to be filed in certain circumstances before income tax refunds can be released.

Trading stock
Taxpayers who reasonably estimate that they have less than $5,000 worth of trading stock at the end of an income year will not be required to value it or include any change in the value in their calculation of income. The new legislation will apply to taxpayers that have taxable supplies for GST purposes of less than $1.3 million in an income year. This will reduce compliance costs and the risk of penalties for taxpayers with small amounts of trading stock at the end of the year.

Threshold for returning income
Taxpayers with small amounts of income from which tax has not been withheld will no longer be required to return it. The new legislation will apply if the value of this income is $200 or less, before any allowable deductions. This will reduce compliance costs associated with returning small amounts of non-withheld income, as well as the risk of penalties applying for not returning the income.

Extending non-filing
The requirement for a return to be filed or an income statement requested on behalf of a deceased taxpayer, in respect of income earned in the income year in which the death occurred, will be removed. The new legislation will also apply to executors and administrators of deceased taxpayers’ estates. This will reduce stress for the families of deceased taxpayers and compliance costs for executors and administrators.

Family assistance
The determination of family assistance entitlements will be simplified, by removing the need to make a number of complex adjustments when calculating them. The adjustments will move the assessment of family assistance from a taxable income basis more towards a welfare definition of “income”.

The new legislation will align the family assistance rules with the general income tax rules, thereby reducing compliance costs associated with making the necessary adjustments for family assistance. It will also reduce the risk of family assistance debt resulting from incorrect application of adjustments.

Family tax credits
The family tax credit will be paid to the principal caregiver instead of both spouses in a two-parent family. This will allow payment of the family tax credit to be better targeted and reduces compliance costs associated with applying for and reconciling family assistance.

Non-resident contractors’ withholding tax
In addition to these measures, a change will be made next year to the Income Tax (Withholding Payments) Regulations 1979, to remove the need for contractors from countries with whom New Zealand has a double tax agreement to apply for a certificate of exemption from tax in New Zealand if they are here for less than 62 days.

Other tax simplification and compliance cost reduction initiatives before Parliament

Taxpayer financial relief
The rules governing taxpayer obligations and the powers of the Commissioner of Inland Revenue will be clarified, to ensure a transparent and equitable treatment of taxpayers. The new legislation will reduce compliance costs for businesses principally by clarifying taxpayer treatment under the debt and hardship rules in the Tax Administration Act 1994, and by allowing quicker resolution of taxpayers’ concerns.

Transfers of overpaid tax
Uncertainty concerning transfers of overpaid tax will be removed. If a business overpays its tax it may ask Inland Revenue to carry forward the excess to a future year, in the expectation that use-of-money interest will be paid on it. However, the law is not clear about whether Inland Revenue can do this if the business has no tax liability in the future year, and therefore whether interest should be paid on the excess tax.

The new legislation will make it clear that Inland Revenue can indeed transfer overpaid tax in this instance, and the change will apply retrospectively provided certain criteria are met.

Transfers of holiday pay
The law will be clarified to remove uncertainty as to the treatment of wage-related provisions when a business is sold and employees are transferred. The new legislation will allow the vendor of a business a deduction for monetary remuneration provisions, thereby reducing compliance costs, because the parties to the transaction are able to achieve a certain and sensible outcome without having to structure the transaction to achieve the same result.

Ownership tracing rules
Widely-held companies will be allowed to continue holding ownership interests on behalf of small shareholders after a restructuring process. Without the new legislation, these companies would be required to trace their ultimate shareholders when determining shareholder continuity for the purpose of carrying forward losses and tax credits. This would mean higher compliance costs.

Pensions paid by partnerships
The law will be clarified to ensure that pensions paid by partnerships to former partners are deductible for tax purposes, thus removing uncertainty on the matter. If such a payment were not deductible, it would be inconsistent with the tax treatment of pensions paid by an employer to a former employee.

Tax simplification and compliance cost reduction initiatives enacted this year

Research and development
Changes to the tax laws relating to research and development expenditure were enacted in October, bringing the rules into closer alignment with accounting practice. Research and development that is expensed under Financial Reporting Standard 13 now qualifies for an immediate tax deduction from the current income year.

Businesses now have more certainty about whether research and development expenditure is capital or revenue. This will reduce business compliance costs and reduce the scope for tax disputes.

Interest deductions for companies
Legislation to clarify and simplify the general interest deductibility rules for most companies was enacted in October. Interest on borrowings is a major business expense for many companies. Although almost all interest incurred was deductible under the previous law, the rules companies were required to work with were complex, and at times companies had to structure their affairs to fit within these rules, which could create significant compliance costs.

The new legislation ensures that interest on borrowing is deductible for most companies without requiring them to overcome these technical hurdles.

Unit trust changes
Technical changes designed to reduce the compliance costs associated with the way that unit trusts operate were enacted in October. For example, one of these changes simplified the shareholder continuity rules. The changes were made in response to problems identified by the savings industry.

Rebates
Legislation giving people more time for claiming tax rebates on donations to charities and payments for housekeeping and childcare was enacted in October. The old six-month deadline for claiming rebates for a particular year was removed, and replaced by the standard eight-year deadline for income tax refunds. The change applies to rebates that should have been claimed in the last tax year, this tax year, and future tax years.

Tax simplification and compliance cost reduction initiatives under development

Rewrite of the Income Tax Act
The rewrite of the Income Tax Act is a long-term project to make tax law easier to use and understand. An exposure draft of rewritten parts of the Act was released for public comment in October. It is a three-volume publication, which covers Parts A to E, definitions and consequential amendments. The work involved restructuring and reformatting the Act and using a plain language drafting style.

Taxation of Maori organisations
The Government released for public comment a discussion document containing proposals to simplify and update the income tax rules applying to Maori organisations and businesses that manage Maori assets.

To support the discussion document, a series of information workshops were held in 22 regions around the country. Over 1200 people representing administrators and trustees of Maori organisations, tax practitioners and others attended the workshops. Because of the considerable interest the original closing date for submissions was extended by three weeks. Overall there was general support for the proposals and the review process.

Balance of More time for business discussion document proposals

The Government is continuing to develop the proposals raised in the More time for business discussion document that have not already been legislated for in the Taxation (Relief, Refunds and Miscellaneous Provisions) Bill. They include consideration of ways of simplifying provisional tax for small business taxpayers and measures to reduce use of money interest costs.

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