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2016 Budget report relating to Tax:

May 30, 2016

Tax cuts may be a while away

Ministerial statement

“When it is affordable, and when economic conditions permit, the Government would like to lower income taxes with a focus on lower and middle income earners who have faced fiscal drag as their incomes continue to rise. However, reducing debt is currently a higher priority than reducing revenue.

The Government is also cautious given the wide band of uncertainty around economic and fiscal forecasts. The new operating allowances mean there isn’t an explicit provision for tax cuts in the forecasts, but the Government will continue to consider options around lowering tax rates and thresholds – either in Budget 2017 or after — if the fiscal situation improves further.”

Editorial comment

On the face of it, the Government’s books are in surplus and those surpluses are forecast to continue growing between now and 2020, potentially funding the promised tax cut. However, forecast surpluses for both the 2016 and 2017 years are a rather modest $700m. This would not seem to give the Government anywhere near the headroom it would need over the next few years to fund the $3 billion tax cut Prime Minister John Key has said he would like to see. Even out to 2020, surpluses are currently fully committed to paying down debt. If there are going to be tax cuts, something’s got to give.

SMEs tax simplification

Ministerial statement

“Further support for businesses — particularly small enterprises — comes through a $187 million SME-friendly tax package, which the Prime Minister announced last month. This provides a better balance of incentives to encourage taxpayers to pay the right amount of tax. Provisional tax will be reformed, with a new pay-as-you-go option allowing small businesses to pay tax as they earn income. Use-of-money interest will be eliminated or reduced for the vast majority of taxpayers. Contractors will be able to choose a withholding tax rate that suits their own circumstances. And the ongoing 1 per cent monthly late-payment penalty will be scrapped from 1 April 2017 for new debt — although immediate penalties and interest charges will continue.”

Editorial comment

These announcements are not new and simply repeat Prime Minister John Key’s earlier statements in his pre-Budget speech to Business New Zealand launching the Making Tax Simpler: Better Business Tax initiative as part of the wider Business Transformation programme.

The proposals are mainly designed to reduce SMEs’ disproportionate compliance costs and include the following.

Changes to provisional tax

  • Increasing the current $50,000 residual income tax ”safe harbour” limit for use of money interest (UOMI) to $60,000 and extending this safe harbour to all taxpayers.
  • Removing UOMI interest for the first two provisional tax payments for all taxpayers who use the uplift method.
  • Allowing businesses with turnover under $5m to use an accounting income basis (AIM) to pay provisional tax on a pay-as-you-go basis through their accounting software with monthly or two-monthly payments linked to the GST return periods (effective from 1 April 2018).
  • Allowing companies to pay tax on behalf of shareholders (effective from 1 April 2018).

Changes to withholding tax

  • Allowing contractors to elect their own withholding rate without applying to Inland Revenue (subject to eligibility limits and a minimum rate of 10% for resident contractors and 15% for non-resident contractors).
  • Extending withholding tax to labour-hire firms.
  • Permitting voluntary withholding agreements.

Changes to late payment penalties

  • No longer imposing incremental late payment penalties (LPP) on future GST, provisional tax, income tax and Working for Families Tax Credits debt.

The reduction of taxpayers’ exposure to UOMI and LPP, representing a valuable step towards a better designed payment system, has been well received, but the view is that the Government could have gone further. The extent of business demand for changes to withholding tax and other previously announced measures is uncertain.

The Making Tax Simpler: Better Business Tax issues paper notes that provisional tax is a source of stress because of the uncertainty and unpredictability of income, with the UOMI and penalty rules imposing further stress. Businesses following provisional tax rules as set out in statute have been hit unfairly with high UOMI charges. Proposals for extension of the safe harbour amount and its use by non-individuals, together with imposing UOMI charges only from the third instalment where the provisional tax uplift method is used, are welcome, particularly for small businesses with seasonal or volatile income-earning patterns.

AIM is technologically revolutionary, with payments generated by accounting software and authorised by the user. The technology does not yet exist and Inland Revenue will need to work with software providers, hence the longer lead time. Some small businesses may appreciate AIM, but it will put pressure on the accuracy of information within accounting systems. Cashflow implications of monthly/two-monthly tax payments may be challenging.
The Government clearly favours greater use of withholding taxes as part of Inland Revenue’s business transformation, with the proposed reforms being only the start.

The above changes will apply from 1 April 2017 (unless otherwise stated) with feedback on the April 2016 issues paper required by 30 May 2016. This package is expected to cost $187m over the next four years.

Business transformation

Ministerial statement

“The tax changes previously announced are part of a wider business transformation programme that embraces new technology to make it easier and less complicated to pay tax. The Budget includes $857 million for Inland Revenue’s new tax administration system, replacing one that is a quarter of a century old.”

Editorial comment

Business Transformation aims to make it easier for every New Zealander to meet their tax obligations, including giving taxpayers greater ability to manage their tax affairs online, and gives more certainty that they will receive their entitlements. Revenue Minister Hon Michael Woodhouse has secured a net $857m to deliver a modern tax system over the next four years.

Over the period to 2020, Budget 2016 will invest $503m of new operating funding and $354m of new capital funding for Inland Revenue’s new tax administration system. As Woodhouse says, “It is important that our tax system keeps pace with changes in New Zealanders’ expectations and changing business models.”

Efficient running of our tax system isn’t sexy. No one ever won a popularity poll on making it easier to pay out money, but a great tax system does matter for our economy. Updating our approach for the digital age is the right call.

Woodhouse aims for small business to be able to devote more time to business rather than tax. “Businesses will find that meeting tax obligations will become part of their normal processes, rather than a separate activity.” What Wooodhouse chooses not to emphasise is the extent to which Business Transformation depends on finding savings from Inland Revenue today. As well the $857m additional funding, Inland Revenue’s existing budget will be cut by $284m by 2020. That saving will be recycled back into Business Transformation.

That means the shape of the existing department isn’t yet clear. Our take is that it will mean cuts in staffing. Less need for document processing centres, increased digital and automated compliance mean fewer overdue debt collectors, fewer auditors and reduced corporate overheads. Inland Revenue will look very different in five years’ time.

It would be a mistake to ignore the main purpose of the tax system: to raise money. The Government expects $280m extra tax through better compliance as a result of Business Transformation, with that revenue kicking in from 2019.

International tax

Ministerial statement

“The Government remains committed to ensuring that everyone pays their share of tax according to the rules. We have a strong tax system in New Zealand and we are making further changes targeted at multi-national companies.

New Zealand recently signed an international agreement that will make it harder for multi-nationals to artificially lower their tax liabilities. We will soon introduce legislation to increase the amount of tax compliance information shared between our treaty partners.

We have commissioned an independent review of the disclosure requirements for foreign trusts, which is due by 30 June. And we will continue to work with the OECD to address tax avoidance.

These changes will help ensure that our tax base and disclosure rules remain robust into the future”.

Editorial comment

No changes have been announced today, but we have been warned. Bill English sets out his position in stark terms: ” … we are making further changes targeted at multinational companies”. He has not specified what these changes will be but it’s clear that information exchange is high on the priority list following the Government’s recent signing of the OECD multilateral competent authority agreement to apply a common reporting standard along with other tax authorities.

We were concerned that we’d see a rushed reaction. Taking a careful look at our international tax setting is the right approach for New Zealand.

GST and NRWT revenue expected

Editorial comment

The Budget papers detail projected revenues from the proposed legislative reforms concerning GST on cross-border services and intangibles, and NRWT: related party and branch lending, of $115m and $116m respectively over the next four years (although kicking in from 2017).

To recap earlier tax developments, services and other intangibles provided to New Zealand residents by offshore suppliers, such as purchases of music from offshore websites, will be subject to GST from 1 October 2016.

The NRWT reform package suggests tax policy changes to strengthen the NRWT and approved issuer levy rules helping to ensure that domestic borrowers and foreign lenders are taxed at a reasonable level.

Based on the CCH Budget Report 2016

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