The Finance and Expenditure Committee has examined the Taxation (Consequential Rate Alignment and Remedial Matters) Bill and recommends that it be passed with the amendments shown.
Introduction
The Taxation (Consequential Rate Alignment and Remedial Matters) Bill primarily seeks to align certain investment tax rates and the related income thresholds with the new individual and company tax rate structure. The new withholding tax rates on interest income are therefore proposed to be 12.5 percent, 21 percent, 30 percent, 33 percent, and 38 percent.
The bill proposes to increase the default rate of resident withholding tax (RWT) on accounts opened on or after 1 April 2010. This applies when an individual does not choose an RWT rate with his or her financial institution, ranging from 19.5 percent to 38 percent, the highest income tax rate.
The bill as introduced also provides that taxpayers with existing accounts at 21 percent (from 1 April 2010) would have their RWT rate changed to the default rate of 38 percent from 1 April 2011, unless they confirmed their correct rates with their financial institutions before 1 April 2011. The committee considered this proposal closely, and we recommend amendments based on these considerations.
The bill also introduces a new 12.5 percent withholding tax rate for secondary income where the taxpayer concerned expects to earn less than $14,000 per annum. The tax rates for portfolio investment entities, retirement scheme contribution tax rates, and the withholding tax rates for extra pays are aligned with the new personal tax rates.
The bill introduces other policy and remedial amendments to the Income Tax Act 2007, the Income Tax Act 2004, the Goods and Services Tax Act 1985, the Tax Administration Act 1994, the Income Tax Act 1994, and the Maori Trustee Amendment Act 2009. For example, the bill eases the requirement for the Commissioner of Inland Revenue to issue personal tax summaries, allowing the Inland Revenue Department to select more effectively the taxpayers to whom such summaries should be issued. The bill also proposes that the Commissioner’s decision to require payment of tax in dispute under section 138I(2B) of the Tax Administration Act 1994 should not be open to challenge.
Technical amendments and focus of our commentary
The bill proposes a raft of technical amendments, on which we make no comment in this report. We understand that tax practitioners and the Inland Revenue Department frequently propose such amendments as they recognise the need for them in the course of using tax legislation.
This commentary sets out only the key amendments we propose and addresses the main issues that we considered. It does not cover minor or technical amendments.
We accept that the new default RWT rate of 21 percent is the rate most likely to ensure that the highest proportion of individuals are taxed at the correct rate. We recognise that there is the potential for the over-taxation of a significant number of taxpayers. We acknowledge this issue, but also took advice on the fiscal cost of lowering the default rate from 19.5 to 12.5 percent, which is estimated by the Inland Revenue Department to be in excess of $40 million per annum.
We have concerns that some tax-payers may be subject to over-taxation. As a consequence, we endorse the assurance from the Inland Revenue Department that it will provide a comprehensive public education programme informing taxpayers of their rights, and urging them to contact their banks so as to ensure that they are taxed at the appropriate rate.
The Inland Revenue Department has assured us that planning and budgeting for such a campaign, in conjunction with major financial institutions, is under way. We would be interested in obtaining data on the effectiveness of that campaign and the number of affected taxpayers.
Some of us have concerns that the majority of those who are over-taxed are among the most vulnerable in our communities, and can least afford to be over-taxed.
Default RWT rate
We recommend removing proposed new section RE12(6) (inserted by clause 45) so that the default rate for existing bank accounts would not be changed to 38 percent from 1 April 2011. We note that more than 90 percent of taxpayers are currently on a marginal tax rate of less than 38 percent. We are concerned that, if the default rate for existing bank accounts were shifted to 38 percent as proposed, many taxpayers who have a lower marginal tax rate (that is, 12.5 percent, 21 percent, or 33 percent), might be over-taxed because they did not know that they would be entitled to RWT rates lower than 38 percent. This might have the inequitable result that some low-income earners would be taxed at the same RWT rate as taxpayers in the highest income bracket. Furthermore, shifting the default rate for existing bank accounts to 38 percent would impose significant administrative costs on the banks and the Inland Revenue Department, as banks would have to notify their customers of the new default rate, and the department would have to issue extra personal tax summaries.
Instead of changing the default rate for existing bank accounts to 38 percent, we recommend inserting new clause 59B to provide that where the Inland Revenue Department determines that individuals are on an RWT rate inconsistent with their marginal tax rate, it may instruct interest payers to shift those individuals to the appropriate RWT rate. We note that the department already uses a similar approach to PAYE tax codes, where it may instruct an employer to use a particular PAYE tax code for an individual.
On the other hand, we recommend that the default rate for new bank accounts opened from 1 April 2010 be 38 percent, as drafted (clause 51). We consider that, if the default rate for new bank accounts were set at the highest tax rate (38 percent), taxpayers would have an incentive to select the appropriate RWT rate for their marginal tax rate when they opened new bank accounts.
Electing RWT rates
We recommend that a person who is moved to a higher RWT rate on the instruction of the Inland Revenue Department to their interest payer be allowed to elect another RWT rate subsequently. We recognise that this may be necessary, as the department may not have information on all the taxpayer’s income sources, and their taxable income may vary significantly from one year to another. However, we note that anyone who chooses to return to a lower RWT rate inappropriately may be returned to the proper RWT rate for their marginal tax rate if the department recognises the discrepancy.
We consider it vital that taxpayers have the opportunity to elect the correct RWT rates and so are neither under-taxed nor over-taxed. We are concerned that some taxpayers, particularly those in the lower income brackets, might not have any basic knowledge of the RWT rates. In addition to endorsing the Inland Revenue Department’s publicity campaign, we also encourage banks and other financial institutions to provide their customers with information setting out the procedure of how to correctly determine their RWT rate and adjust it accordingly.
Issues not leading to amendments
We believe that several policy issues discussed during the hearing of evidence and consideration are noteworthy, although they did not result in any recommended amendments to the bill.
Personal tax summaries
We support the proposal to give the Commissioner of Inland Revenue discretion to determine who should receive an income statement (commonly known as a personal tax summary) automatically (clauses 62 to 64). We consider that this would allow the department to reduce its administrative costs; otherwise the Inland Revenue Department would remain obliged to issue such summaries to some taxpayers unnecessarily, when the correct amount of tax is likely to have been withheld.
We are aware of concern that some taxpayers might not receive tax refunds to which they would otherwise be entitled. However, we were assured by the Inland Revenue Department that a taxpayer could still request a personal tax summary in order to establish entitlement to a tax refund.
To help taxpayers claim any tax refunds to which they are entitled, we encourage the department to publicise information on how to obtain a summary of earnings and personal tax summaries. We also encourage the department to alert taxpayers with student loan obligations to the possibility of using any tax refund to offset these obligations.
Income for portfolio investment entities (PIEs)
We noted submissions that PIE income should be subject to the same marginal tax rates as ordinary income, and, in particular, should not be capped at 30 percent. We also noted submissions that PIE income should be taken into account for the purpose of determining entitlements to State-provided benefits or related obligations.
We consider these submissions to be outside the ambit of this bill because it does not aim to introduce substantive policy changes. However, we encourage the Inland Revenue Department to look into the issues raised in these submissions, to determine whether they will need to be addressed in the future.
Tax in dispute
We support the proposal that a decision by the Commissioner of Inland Revenue to require payment of tax in dispute under section 138I(2B) of the Tax Administration Act 1994 should not be challengeable (clause 67). The Commissioner can require payment of tax in dispute only where there is a significant risk that the tax will not be paid if an objection is not successful. In practice, the Commissioner exercises this power only in exceptional circumstances, for example when he or she considers there is a risk of flight. The proposed amendment would not enlarge the Commissioner’s powers in this respect.
We note that if the Commissioner’s decision to require payment of tax in dispute under section 138I(2B) of the Tax Administration Act 1994 were challengeable, the disputant, while challenging the decision, might undertake the very behaviour the decision sought to prevent, such as fleeing New Zealand. This might undermine the Commissioner’s ability to manage the risk of non-payment. We therefore consider the proposal in clause 67 to be justified.
We note that the amendment would remove only the right to challenge the Commissioner’s decision to make payment not disputable. Taxpayers would retain full rights to challenge the tax issue underlying any such dispute.
Compliance costs of the RWT regime
We noted concern that the RWT regime creates difficulties for casual payers of interest and dividends, and imposes compliance costs on small businesses. While we agree with the Inland Revenue Department that there is not enough time to address this concern in the context of this bill, we encourage the department to consider this matter further and address it as soon as possible.
Electronic communication
We noted the call for electronic communication between the Inland Revenue Department and taxpayers. We were told by the department that part of its Transform Inland Revenue project involves removing legislative and operational barriers to communicating electronically with taxpayers. In particular, the department is considering
•how taxpayers will be notified that they will receive electronic communication from the department
•how the department will obtain taxpayers’ correct email addresses
•what information and documents will be communicated electronically
•whether and in what form guidelines on electronic communications between the department and taxpayers will be published.
We note that clause 57 would allow the Commissioner of Inland Revenue to communicate with taxpayers electronically unless there were reasonable grounds to suppose that the notice would not be received by the addressee. We noted the concern that this provision could encourage the Inland Revenue Department to become indifferent to whether emails were sent to the correct email addresses of the intended recipients. We will monitor closely developments in electronic communication between the department and taxpayers.
Comprehensiveness of explanatory note
We consider that some of the changes introduced by the bill, particularly remedial or technical changes, could have been explained further in the bill’s explanatory note. We acknowledge that the Inland Revenue Department usually publishes an associated commentary upon the introduction of each tax bill, which is accessible through the Inland Revenue Department website; but nevertheless we emphasise the importance of clear, comprehensive explanatory notes. We also note that some submitters suggested that the department’s commentary associated with this bill needed more detail in some areas. We encourage the Inland Revenue Department to attend to the issue we have raised here when it prepares explanatory notes for future bills.
Appendix
Committee process
The Taxation (Consequential Rate Alignment and Remedial Matters) Bill was referred to us on 28 July 2009. The closing date for submissions was 25 August 2009. We received and considered 12 submissions, and heard five from interested groups and individuals.
We received advice from the Inland Revenue Department, our independent specialist adviser on tax issues, Therese Turner (Chartered Accountant), and our independent specialist adviser on legislative drafting, George Tanner QC.
Commentary
Recommendation
The Finance and Expenditure Committee has examined the Taxation (Consequential Rate Alignment and Remedial Matters) Bill and recommends that it be passed with the amendments shown.
Introduction
The Taxation (Consequential Rate Alignment and Remedial Matters) Bill primarily seeks to align certain investment tax rates and the related income thresholds with the new individual and company tax rate structure. The new withholding tax rates on interest income are therefore proposed to be 12.5 percent, 21 percent, 30 percent, 33 percent, and 38 percent.
The bill proposes to increase the default rate of resident withholding tax (RWT) on accounts opened on or after 1 April 2010. This applies when an individual does not choose an RWT rate with his or her financial institution, ranging from 19.5 percent to 38 percent, the highest income tax rate.
The bill as introduced also provides that taxpayers with existing accounts at 21 percent (from 1 April 2010) would have their RWT rate changed to the default rate of 38 percent from 1 April 2011, unless they confirmed their correct rates with their financial institutions before 1 April 2011. The committee considered this proposal closely, and we recommend amendments based on these considerations.
The bill also introduces a new 12.5 percent withholding tax rate for secondary income where the taxpayer concerned expects to earn less than $14,000 per annum. The tax rates for portfolio investment entities, retirement scheme contribution tax rates, and the withholding tax rates for extra pays are aligned with the new personal tax rates.
The bill introduces other policy and remedial amendments to the Income Tax Act 2007, the Income Tax Act 2004, the Goods and Services Tax Act 1985, the Tax Administration Act 1994, the Income Tax Act 1994, and the Maori Trustee Amendment Act 2009. For example, the bill eases the requirement for the Commissioner of Inland Revenue to issue personal tax summaries, allowing the Inland Revenue Department to select more effectively the taxpayers to whom such summaries should be issued. The bill also proposes that the Commissioner’s decision to require payment of tax in dispute under section 138I(2B) of the Tax Administration Act 1994 should not be open to challenge.
Technical amendments and focus of our commentary
The bill proposes a raft of technical amendments, on which we make no comment in this report. We understand that tax practitioners and the Inland Revenue Department frequently propose such amendments as they recognise the need for them in the course of using tax legislation.
This commentary sets out only the key amendments we propose and addresses the main issues that we considered. It does not cover minor or technical amendments.
We accept that the new default RWT rate of 21 percent is the rate most likely to ensure that the highest proportion of individuals are taxed at the correct rate. We recognise that there is the potential for the over-taxation of a significant number of taxpayers. We acknowledge this issue, but also took advice on the fiscal cost of lowering the default rate from 19.5 to 12.5 percent, which is estimated by the Inland Revenue Department to be in excess of $40 million per annum.
We have concerns that some tax-payers may be subject to over-taxation. As a consequence, we endorse the assurance from the Inland Revenue Department that it will provide a comprehensive public education programme informing taxpayers of their rights, and urging them to contact their banks so as to ensure that they are taxed at the appropriate rate.
The Inland Revenue Department has assured us that planning and budgeting for such a campaign, in conjunction with major financial institutions, is under way. We would be interested in obtaining data on the effectiveness of that campaign and the number of affected taxpayers.
Some of us have concerns that the majority of those who are over-taxed are among the most vulnerable in our communities, and can least afford to be over-taxed.
Default RWT rate
We recommend removing proposed new section RE12(6) (inserted by clause 45) so that the default rate for existing bank accounts would not be changed to 38 percent from 1 April 2011. We note that more than 90 percent of taxpayers are currently on a marginal tax rate of less than 38 percent. We are concerned that, if the default rate for existing bank accounts were shifted to 38 percent as proposed, many taxpayers who have a lower marginal tax rate (that is, 12.5 percent, 21 percent, or 33 percent), might be over-taxed because they did not know that they would be entitled to RWT rates lower than 38 percent. This might have the inequitable result that some low-income earners would be taxed at the same RWT rate as taxpayers in the highest income bracket. Furthermore, shifting the default rate for existing bank accounts to 38 percent would impose significant administrative costs on the banks and the Inland Revenue Department, as banks would have to notify their customers of the new default rate, and the department would have to issue extra personal tax summaries.
Instead of changing the default rate for existing bank accounts to 38 percent, we recommend inserting new clause 59B to provide that where the Inland Revenue Department determines that individuals are on an RWT rate inconsistent with their marginal tax rate, it may instruct interest payers to shift those individuals to the appropriate RWT rate. We note that the department already uses a similar approach to PAYE tax codes, where it may instruct an employer to use a particular PAYE tax code for an individual.
On the other hand, we recommend that the default rate for new bank accounts opened from 1 April 2010 be 38 percent, as drafted (clause 51). We consider that, if the default rate for new bank accounts were set at the highest tax rate (38 percent), taxpayers would have an incentive to select the appropriate RWT rate for their marginal tax rate when they opened new bank accounts.
Electing RWT rates
We recommend that a person who is moved to a higher RWT rate on the instruction of the Inland Revenue Department to their interest payer be allowed to elect another RWT rate subsequently. We recognise that this may be necessary, as the department may not have information on all the taxpayer’s income sources, and their taxable income may vary significantly from one year to another. However, we note that anyone who chooses to return to a lower RWT rate inappropriately may be returned to the proper RWT rate for their marginal tax rate if the department recognises the discrepancy.
We consider it vital that taxpayers have the opportunity to elect the correct RWT rates and so are neither under-taxed nor over-taxed. We are concerned that some taxpayers, particularly those in the lower income brackets, might not have any basic knowledge of the RWT rates. In addition to endorsing the Inland Revenue Department’s publicity campaign, we also encourage banks and other financial institutions to provide their customers with information setting out the procedure of how to correctly determine their RWT rate and adjust it accordingly.
Issues not leading to amendments
We believe that several policy issues discussed during the hearing of evidence and consideration are noteworthy, although they did not result in any recommended amendments to the bill.
Personal tax summaries
We support the proposal to give the Commissioner of Inland Revenue discretion to determine who should receive an income statement (commonly known as a personal tax summary) automatically (clauses 62 to 64). We consider that this would allow the department to reduce its administrative costs; otherwise the Inland Revenue Department would remain obliged to issue such summaries to some taxpayers unnecessarily, when the correct amount of tax is likely to have been withheld.
We are aware of concern that some taxpayers might not receive tax refunds to which they would otherwise be entitled. However, we were assured by the Inland Revenue Department that a taxpayer could still request a personal tax summary in order to establish entitlement to a tax refund.
To help taxpayers claim any tax refunds to which they are entitled, we encourage the department to publicise information on how to obtain a summary of earnings and personal tax summaries. We also encourage the department to alert taxpayers with student loan obligations to the possibility of using any tax refund to offset these obligations.
Income for portfolio investment entities (PIEs)
We noted submissions that PIE income should be subject to the same marginal tax rates as ordinary income, and, in particular, should not be capped at 30 percent. We also noted submissions that PIE income should be taken into account for the purpose of determining entitlements to State-provided benefits or related obligations.
We consider these submissions to be outside the ambit of this bill because it does not aim to introduce substantive policy changes. However, we encourage the Inland Revenue Department to look into the issues raised in these submissions, to determine whether they will need to be addressed in the future.
Tax in dispute
We support the proposal that a decision by the Commissioner of Inland Revenue to require payment of tax in dispute under section 138I(2B) of the Tax Administration Act 1994 should not be challengeable (clause 67). The Commissioner can require payment of tax in dispute only where there is a significant risk that the tax will not be paid if an objection is not successful. In practice, the Commissioner exercises this power only in exceptional circumstances, for example when he or she considers there is a risk of flight. The proposed amendment would not enlarge the Commissioner’s powers in this respect.
We note that if the Commissioner’s decision to require payment of tax in dispute under section 138I(2B) of the Tax Administration Act 1994 were challengeable, the disputant, while challenging the decision, might undertake the very behaviour the decision sought to prevent, such as fleeing New Zealand. This might undermine the Commissioner’s ability to manage the risk of non-payment. We therefore consider the proposal in clause 67 to be justified.
We note that the amendment would remove only the right to challenge the Commissioner’s decision to make payment not disputable. Taxpayers would retain full rights to challenge the tax issue underlying any such dispute.
Compliance costs of the RWT regime
We noted concern that the RWT regime creates difficulties for casual payers of interest and dividends, and imposes compliance costs on small businesses. While we agree with the Inland Revenue Department that there is not enough time to address this concern in the context of this bill, we encourage the department to consider this matter further and address it as soon as possible.
Electronic communication
We noted the call for electronic communication between the Inland Revenue Department and taxpayers. We were told by the department that part of its Transform Inland Revenue project involves removing legislative and operational barriers to communicating electronically with taxpayers. In particular, the department is considering
•how taxpayers will be notified that they will receive electronic communication from the department
•how the department will obtain taxpayers’ correct email addresses
•what information and documents will be communicated electronically
•whether and in what form guidelines on electronic communications between the department and taxpayers will be published.
We note that clause 57 would allow the Commissioner of Inland Revenue to communicate with taxpayers electronically unless there were reasonable grounds to suppose that the notice would not be received by the addressee. We noted the concern that this provision could encourage the Inland Revenue Department to become indifferent to whether emails were sent to the correct email addresses of the intended recipients. We will monitor closely developments in electronic communication between the department and taxpayers.
Comprehensiveness of explanatory note
We consider that some of the changes introduced by the bill, particularly remedial or technical changes, could have been explained further in the bill’s explanatory note. We acknowledge that the Inland Revenue Department usually publishes an associated commentary upon the introduction of each tax bill, which is accessible through the Inland Revenue Department website; but nevertheless we emphasise the importance of clear, comprehensive explanatory notes. We also note that some submitters suggested that the department’s commentary associated with this bill needed more detail in some areas. We encourage the Inland Revenue Department to attend to the issue we have raised here when it prepares explanatory notes for future bills.
Appendix
Committee process
The Taxation (Consequential Rate Alignment and Remedial Matters) Bill was referred to us on 28 July 2009. The closing date for submissions was 25 August 2009. We received and considered 12 submissions, and heard five from interested groups and individuals.
We received advice from the Inland Revenue Department, our independent specialist adviser on tax issues, Therese Turner (Chartered Accountant), and our independent specialist adviser on legislative drafting, George Tanner QC.
Committee membership
Craig Foss (Chairperson)
Amy Adams
David Bennett
John Boscawen
Brendon Burns
Charles Chauvel (from 14 October 2009)
Hon David Cunliffe
Aaron Gilmore
Raymond Huo (until 14 October 2009)
Rahui Katene
Peseta Sam Lotu-Iiga
Stuart Nash
Dr Russel Norman