Tax Compliance Costs ReducedBill English Treasurer
Many of the planned changes, to be announced in further detail next month, will also introduce greater flexibility and clarity into the tax laws as they affect the self employed and small businesses, Treasurer, Bill English and Minister of Finance and Revenue Sir William Birch said today.
Panels of small business experts would be set up to test the ease of use of new and existing laws and help reduce compliance costs.
"The Government has made a strong commitment to simplify the tax system to make it easier for tax payers. It has already introduced the first step to assist PAYE wage earners by removing the requirement to file IR5s. The next step seeks ways to reduce compliance costs, especially for small businesses and the self employed.
"Next month we'll be releasing a discussion document on tax simplification measures inviting public submissions on a range of options to reduce compliance costs. Included in the document will be proposals to make it easier for people who do find themselves in difficulty with the tax system. For example, the Government will reduce the incremental penalties for late payment of tax from 2% to 1% a month. Penalties are there for a purpose, to promote compliance with the law, but if they're too harsh they can be counter-productive," the Ministers said.
"The Government believes the tax penalty system should be more flexible with regard to taxpayers who pay just a few days late. We would like to ease the penalties imposed on them, since they are essentially honest taxpayers and to penalise them excessively does not promote compliance.
"We plan to clarify the law relating to serious hardship, financial difficulty and instalment arrangements. At present these arrangements only apply to income tax and fringe benefit tax. Extending these to apply to all tax types and those in serious hardship, will increase the consistency of treatment across tax types and will reduce compliance and administrative costs.
"People who do enter instalment arrangements to pay their tax will have their rights and obligations clarified, and will be provided with certainty with regard to these arrangements. Furthermore, partial failure to comply with the instalment arrangement will not result in a disproportionate penalty.
"The Government is also looking at ways of ensuring that Inland Revenue and taxpayers can enter into instalment arrangements more quickly. It will raise the threshold above which the Minister of Finance is required to approve instalment arrangements or hardship remissions. The threshold will be raised from the current $50,000 to $100,000.
"Many of these issues were raised in submissions to the Finance and Expenditure Committee's inquiry into the Inland Revenue Department, and by the Committee of Experts on Tax Compliance. It is clear that these issues need to be tackled."
TAX COMPLIANCE COSTS REDUCED -QUESTIONS AND ANSWERS
Q. What does this really mean for taxpayers?
- Last year the Government removed the requirement to file IR5 returns. This will result in a significant reduction in compliance costs for wage and salary earners. Today's announcement signals the Government's commitment to moving the focus onto reducing the compliance costs for all business taxpayers, particularly for the self employed and small business taxpayers. The Government is currently examining a wide range of both administrative and policy options to reduce the compliance costs of taxation, and will consult widely on the proposals.
Q. What other initiatives to reduce compliance costs does Government intend to announce next month?
- The Government is currently considering a wide range of both administrative and policy options to reduce compliance costs. Options being considered include, aligning tax payment dates, simplifying forms, and increasing the safe harbour threshold for provisional taxpayers. Government is also working closely with the Institute of Chartered Accountants to ensure that the proposals reflect the concerns of taxpayers and their agents.
Q. What is the impact of the policy changes announced today?
- The policy proposals announced today will assist taxpayers by reducing the penalties faced by taxpayers who get into difficulty by:
- reducing the penalties and ensuring penalties are not applied when payment dates are only missed by a few days, and;
- clarifying how we treat those taxpayers who enter into instalment arrangement. In particular, the announcements made today will ensure taxpayers who enter into arrangements and only partially fail to comply with instalment arrangements are fairly treated.
Q. When will these changes take place?
- The changes announced today will require legislation. These changes will be included in the next tax bill. They will also be subject to the Generic Tax Policy Process, which will mean that the proposed changes are subject to extensive consultation before legislation is drafted. The consultation will take the form of a discussion document which will be published next month.
Reducing the incremental late payment penalty form 2% to 1%
Q. What is the current late payment penalty regime?
- Currently if a taxpayer is late with a payment they face a 5% penalty, plus an incremental penalty of 2% for each additional month. The use of money interest also applies.
Q. What will be the impact of reducing the penalty from 2% to 1%?
- Reducing the incremental penalty will reduce the combined effect of late payment penalties and use of money interest from over 50% per annum to approximately 30% per annum, which is only slightly higher than commercial trade creditor rates. The Government considers that the annualised penalty rates are too high and reducing penalties will assist with ensuring voluntary compliance.
Q. How many taxpayers will be affected by the changes announced today?
- For the main tax types in the year ending 30 June 1999 approximately 400,000 late payment penalties were applied with a total value of $18 million, and 2.6 million incremental penalties were applied (ie the current 2% per month, reducing to 1%) with a total value of $93 million.
The figures above show the number of penalties, but not the number of taxpayers. Some taxpayers are likely to have multiple penalties for different periods and tax types. Therefore the number of taxpayers who would have been affected in the past year would be significantly lower than 400,000.
Clarifying the Law with regard to Serious Hardship, Financial Difficulty and Instalment Arrangements
Q. What is the current treatment for remitting tax in cases of serious hardship and financial difficulty?
- Currently there are specific provisions in the Tax Administration Act that in certain circumstances allow the Commissioner to remit tax in cases of serious hardship and financial difficulties. However, these provisions only apply to income tax and fringe benefit tax. If taxpayers face serious hardship in meeting obligations other than income tax and FBT (e.g. GST and PAYE) the Inland Revenue must use a general administrative discretion to remit the tax. This discretion is contained in sections 6 and 6A of the Tax Administration Act. These provisions are known as the "care and management provisions".
Q. What is the difficulty with the current treatment?
- Practically, taxpayers also face serious hardship and financial difficulties in meeting their tax obligations for taxes other than income tax and fringe benefit tax (e.g. GST and PAYE). The use of the "care and management provisions" to remit taxes in situations like this can lead to uncertainty and inconsistency of treatment. This can result in increased administration and compliance costs.
Q. How will the inclusion of all tax types in the financial difficulty remission provisions assist taxpayers?
- The extension of the financial difficulty remission provisions to all tax types will mean that the Inland Revenue will no longer have to rely on the "care and management" provisions in order to remit tax other than income tax and fringe benefit tax. This will result in greater clarity and consistency of treatment. This should result in reduced administrative and compliance costs.
Q. What is the current treatment for entering into instalment arrangements in cases of serious hardship and financial difficulty?
- Currently there are specific provisions in the Tax Administration Act that in certain circumstances allow the Commissioner to enter into instalment arrangements when a taxpayer is in financial difficulty. However, these provisions only apply to income tax and fringe benefit tax. The Commissioner of Inland Revenue uses the care and management provisions of the Tax Administration Act to enter instalment arrangements concerning tax types other than income tax and fringe benefit tax.
Q. What is the difficulty with the current treatment?
- Practically, taxpayers also face serious hardship and financial difficulties in meeting their tax obligations for taxes other than income tax and fringe benefit tax (e.g. GST and PAYE). The use of the "care and management provisions" to enter into installment arrangements in situations like this can lead to inconsistency of treatment and increased compliance costs.
Q. How will the inclusion of all tax types in the financial difficulty instalment arrangement provisions assist taxpayers?
- The extension of the financial difficulty instalment arrangement provisions to all tax types will mean that the Inland Revenue will no longer have to rely on the care and management provisions in order to enter into arrangements concerning tax other than income tax and fringe benefit tax. This will result in greater clarity and consistency of treatment which should result in reduced administrative and compliance costs.
Q. What is the current treatment for taxpayers that enter an instalment arrangement?
- Currently, if a taxpayer approaches the Inland Revenue before the date either fringe benefit tax or income tax is due, and enters into an instalment arrangement to pay that tax, and the taxpayer complies with their obligations under the arrangement, the Commissioner must cancel incremental late payment penalties as well as 60% of the initial late payment penalty.
Q. How will the clarification assist taxpayers?
- The legislation will provide a clear framework for entering instalment arrangements. This framework will give both taxpayers and Inland Revenue clear guidance on their respective rights and obligations in relation to all instalment arrangements.
Q. What currently happens if a taxpayer partially fails to comply with an instalment arrangement?
- Currently, if taxpayers default in any way on their payments during the term of an arrangement, the whole arrangement is cancelled and all accumulated incremental penalties that would otherwise have been cancelled are reinstated. The period over which taxpayers have complied is not recognised. This lack of recognition can be significant when taxpayers default close to the end of an instalment arrangement.
Q. How does the Government intend to ensure that partial failure to comply with an instalment arrangement will not result in a disproportionate penalty?
- The extent to which a taxpayer should be penalised for partial failure to comply with the terms of an instalment arrangement is a complex issue. The Government will provide more details on this when it publishes a tax simplification discussion document in September 1999.
Improving the flexibility with regard to taxpayers that are just a few days late with their payments.
Q. What is the current situation for those taxpayers who are just a few days late with their payments?
- Even if a taxpayer is only a day late they will face an initial 5% penalty on their tax.
Q. How will the Government assist those who are just a few days late?
- The Government recognises that greater flexibility should be afforded to taxpayers who genuinely endeavour to comply with their obligations. Honest taxpayers who are a few days late should not be heavily penalised. The Government is considering a range of options, including the possibility of a grace period of a few days after the due date for tax before the 5% penalty would apply.
Increasing the Thresholds for Ministerial approval of instalment arrangement or hardship remission from $50,000 to $100,000?
Q. Why has the threshold been increased?
- The threshold has been increased to ensure only the most significant cases are referred to the Minister. The increase in the threshold will ensure that delays in providing decisions on relief should be avoided, particularly because affected taxpayers are in difficult economic circumstances. Both administrative and compliance cost savings should be made when processing requests for relief is made more efficient.
Q. How many taxpayers enter instalments or hardship remission over $50,000?
- As at 30 April 1999 there were a total of 53,099 instalment arrangements, of which 348 were for amounts between $50,000-$100,000 (total value of $23.5 million) and 142 for amounts in excess of $100,000 (total value $29.7 million).
Q. How do these policy announcement relate to the Finance and Expenditure Committee's Inquiry into Inland Revenue?
- Many of the issues raised in the submissions to FEC Inquiry relate directly to IRD's application of penalties and arrangements for those in arrears. The Government has recognised that there are a range of issues around penalties and instalment arrangements that needed to be addressed. Today's announcement will tackle many of the concerns raised in the submissions.