By Terry Baucher*
“We need a simplified, fair, equitable, easy to follow, easy to understand, and easy to comply with TAX CODE”
This was 'Boatman’s' enthusiastic response on this website to the news that Revenue Minister Roger McClay is setting up a Tax Simplification Panel.
Boatman’s remarks kicked off a lively debate on these pages about the merits or otherwise of the current system and what should be done.
However, it’s unlikely that Boatman’s suggestion to “wipe the board clean and start with a clean …page” will be fulfilled, as the Panel’s focus will be on tax administration not tax policy.
Noting that one million people now use Voice ID and more than 1.7 million are registered for myIR, the Minister explained that the Tax Simplification Panel “is a chance for Kiwis to have their say on Inland Revenue’s processes, to tell us about the things that might frustrate them, and submit ideas about how things can be done better”…
“I am particularly keen that we engage with individual taxpayers and small-to-medium business owners about how we can reduce the amount of time they spend on red-tape and tax compliance.”
Involving the public might seem like a fashionable sop to consultation, but the danger for me and other full time tax professionals is that we are so close to the topic we no longer see the wood for the trees.
Actively involving the public should therefore be a welcome antidote to any professional conformity of thinking.
So where are the areas I would focus on?
Over the years Inland Revenue’s role has considerably expanded so that as well as assessing and collecting taxes it is now involved in redistribution policies such as Child Support, Student Loans, Working for Families and KiwiSaver.
Therefore the first place I’d look for improvements is to ensure that information only needs to be provided once so there is no duplication with other Government agencies.
Nothing is more frustrating than providing duplicate information to different departments, or worse, being asked for additional details, often weeks later.
The second area is around the operation of PAYE. The introduction of PAYE in 1958 was a genuine game-changer in tax administration. But in the past 20 years, the nature of employment has changed considerably.
Consequently, many of the 3 million taxpayers currently on PAYE change employment frequently or work part-time in several jobs.
As PAYE is calculated on a pay period basis for each job, taking no account of a person’s earnings to date, this results in many people overpaying their tax during the year.
This problem is compounded by the secondary taxation system.
The result is that right now the whole tax system gets overloaded as taxpayers look to claim back tax overpaid.
One answer would be to move to calculating PAYE cumulatively as already happens in the UK. This could be allied to introducing another recent UK initiative: operating PAYE in real time or RTI. Under RTI each employer submits details of the payments made to an employee BEFORE each pay day. The intention is that providing information earlier allows records to be kept up-to-date enabling a person’s subsequent tax liability to be adjusted during the year where appropriate. It would also enable prompter responses when a person’s circumstances change (they retire or become eligible for a benefit of some nature).
Finally, what about the over 450,000 small and medium enterprises which comprise 97% of all businesses?
There’s no doubt they face a significant compliance burden.
Each year a small business turning over, say, $1 million and employing staff must file 12 PAYE returns, 6 GST returns and maybe 4 FBT returns. It must also pay three provisional tax instalments together with an annual ACC Employer Levy.
That is a lot of interactions and time spent on tax compliance.
One option might be something similar to the Australian Tax Office Business Activity Statements. These are quarterly returns of GST, FBT and the equivalent of PAYE and provisional tax.
Other initiatives could include more widely promoting the GST ratio method, revising (or better still, scrapping) the late payment penalty regime, and providing greater incentives (such as more generous use of money interest terms) for the 85% of taxpayers who do pay on time.
Perhaps providing direct support in the form of expanding the subsidies for those businesses who engage payroll agents or tax agents could be trialled. Helping small businesses become more efficient increases profitability and therefore the tax take, resulting in a win for everybody.
However, as can be seen, a simplification for a small business might not be easily reconcilable with any additional work arising from improvements for individuals on PAYE such as RTI.
That interaction is just one of the issues the Tax Simplification Panel will need to address and resolve. (As one of the writers of Game of Thrones remarked, tragedy is often not a choice between good and evil but between two goods).
Last week the influential Trans Tasman Political Report named Inland Revenue as its Government Department of the Year in its 2014 Annual Briefing Report.
As one of the Independent Board of Advisers who made the decision noted, Inland Revenue has become a “good upcoming public sector leader. One of the only Departments leading the charge online for better customer and business interactions”.
The call for public input into the Tax Simplification Panel represents a great opportunity for people to have direct input into continuing the IRD’s “charge online for better customer and business interactions”.
I will be providing feedback and I’d urge you to take the opportunity to do the same.
So get your thinking caps on because as the saying goes, “if you don’t ask, you don’t get”.
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*Terry Baucher is an Auckland-based tax specialist and head of Baucher Consulting. You can contact him here »
5 Comments
Simplification huh?
When I first journeyed to Australia the Australian Tax Act was 2,500 pages long
By 2005 it was 6,000 pages long
In 2001 when GST was introduced, it added another 3,000 pages
You can add to that the introduction of compulsory Superannuation which by 2005 was another 2,500 pages administered by the ATO
In the space of just over 10 years, the tax environment expanded from 2,500 pages of regulation to over 10,000 pages, and so it sits there today
What's the situation in New Zealand?
From what I have read in the news media, the IRD struggles to keep abreast of technology while using outdated systems
One suggestion would be to outsource it to the Australian Tax Office
They are slick, ruthlessly aggressive and right up to date on the technology front
But, it doesn't amount to a row of beans when you look at the Tax gymnastics of the likes of Google
Have a look at Google's Fancy Footwork
http://www.smh.com.au/business/entitlement-is-in-the-eye-of-the-beholde…
It's an instruction manual on how to undermine the intentions of the regulators
Minimal Terminal Income tax, or provisional tax, and NO GST
Therefore the first place I’d look for improvements is to ensure that information only needs to be provided once so there is no duplication with other Government agencies.
be careful. Do you really want say Work & Income staff having access to all your tax info? ACC staff knowing when you were on a benefit or off sick with mental health issues.. and so on. There are good reasons to compartmentalise info, security of private information being paramount.
APT taxation system????? I am so over all the compliance and costs associated with the compliance that I'm more than willing to pay tax on every damn transaction so I can avoid all the endless hours of bookwork involved. I can see there would be efficiency, tansparency, simplicity and fairness and I'd have more time to do the things that are important to me.
So how serious is this tax simplification panel going to be? Or are they just another heap of no-hopers who will waste endless hours and resources coming up with BS reasons.
All the Tax Simplification Panel should be concentrating on is the cheapest, fairest, most efficient, simplist and transparent way of collecting the income from the Stock to the Government. And APT taxation does this?
http://en.wikipedia.org/wiki/Financial_transaction_tax#Automated_paymen…
"In 1989, Edgar L. Feige proposed a synthesis and extension of the ideas of Keynes and Tobin by proposing a flat rate tax on all transactions.[31] The total volume of all transactions undertaken in an economy represents the broadest possible tax base and therefore requires the lowest flat tax rate to raise any requisite amount of revenue. Since financial transactions in stocks, bonds, international currency transactions and derivatives comprise most of the automated payment transaction (APT) tax base, it is in essence the broadest of financial transaction taxes. Initially proposed as a revenue neutral replacement for the entire Federal tax system of the United States,[32] it could alternatively be considered as a global tax whose revenues could be used by national governments to reduce existing income, corporate and VAT tax rates as well as reducing existing sovereign debt burdens. If adopted by all of the developed nations, it would have the advantage of eliminating all incentives for substitution between financial assets and between financial centers since all transactions would universally be taxed at the identical flat tax rate".
http://en.wikipedia.org/wiki/Automated_payment_transaction_tax
The Automated Payment Transaction (APT) tax is a proposal to replace all United States taxes with a single tax (using a low rate) on every transaction in the economy. The system was developed by University of Wisconsin–Madison Professor of Economics Dr. Edgar L. Feige.
The foundations of the APT tax proposal—a small, uniform tax on all economic transactions—involve simplification, base broadening, reductions in marginal tax rates, the elimination of tax and information returns and the automatic collection of tax revenues at the payment source. The APT approach would extend the tax base from income, consumption and wealth to all transactions. Proponents regard it as a revenue neutral transactions tax, whose tax base is primarily made up of financial transactions. The APT tax extends the tax reform ideas of John Maynard Keynes,[1]James Tobin[2] and Lawrence Summers,[3] to their logical conclusion, namely to tax the broadest possible tax base at the lowest possible tax rate. The goal to significantly improve economic efficiency, enhance stability in financial markets, and reduce to a minimum the costs of tax administration (assessment, collection,and compliance costs). There is disagreement over whether the tax is progressive, with the debate primarily centered around whether the volume of taxed transactions rise disproportionately with a person's income and net worth. Simulations of the Federal Reserve's Survey of Consumer Finances [4] demonstrate that high income and wealthy individuals undertake a disproportionate volume of transactions since they own a disproportionate share of financial assets that have relatively high turnover rates. However, since the APT tax has not yet been adopted, some argue that one can not predict whether the tax will be progressive or not.
Daniel Akst, writing in the New York Times,[5] wrote "the Automated Payment Transaction tax offers fairness, simplicity, and efficiency. It may not be a free lunch. But it sure smells better than the one we eat now." On April 28, 2005, the APT proposal was presented to the President's Advisory Panel on Federal Tax Reform in Washington, DC.[6]
I agree that some form of APT could be very good.
I think it is a non-starter given the terms of reference for this process, which seem destined to lead to a website redesign and a new call system.
That said, if enough people ignored what they were asking for and wrote in suggesting something like APT they could take the hint in future. Generally you only get tax reform that extensive from a new governemnt though.
NZ already has a very simple tax system. A very large % of NZers don't need an accountant for example, in Australia almost everyone needs an accountant because it's so complex. Low tax, low complexity, just the way I like it!
Sure we should continue to find ways of further simplifying the tax system but it doesn't feel broken to me.
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