Omnibus tax Bill modernising revenue system reported back

On the 16 January 2019, the Finance and Expenditure Committee reported back on the Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill (72-2). Introduced into Parliament on 28 June 2018, the Bill proposes modernising the revenue system by making tax simpler and easier for individuals and simplifying rules and processes.

The Bill proposes amendments to various taxation-related Acts and regulations. It sets the annual rates of income tax for the 2018/19 tax year (with no change from the previous year) and makes several other policy and remedial changes.

In addition to modernising and improving the administration of the tax system and simplifying tax obligations for many individuals, the Bill also proposes:

introducing a “short process ruling” allowing small businesses to apply for a binding ruling from Inland Revenue on how a taxation law would apply
allowing people over 65 years to join KiwiSaver, although employers would not be obliged to make contributions for them, and
adding new KiwiSaver employee contribution rates of 6% and 10% to the existing rates of 3%, 4%, and 8%.

Proposed amendments included in two SOPs
‍After the Bill was introduced, the Minister of Revenue released two Supplementary Order Papers (SOPs) proposing the following amendments to the Bill:

SOP 74 (released on 14 August 2018) proposes amending the Income Tax Act 2007 and the Goods and Services Tax Act 1985 to:

To require non-profit bodies to return GST on supplies of goods and services if they have received GST deductions on those goods and services extend depreciation roll-over relief provisions for the Canterbury earthquakes for a further five years, and to address a technical flaw regarding hybrid payments in the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018.

The Committee has recommended that the amendments proposed in SOP 74 be incorporated into the Bill.

SOP 135 (released on 16 October 2018) proposes amending the Income Tax Act and the Tax Administration Act 1994 to give effect to the Government’s policy of encouraging new investment in bloodstock breeding. It would allow for tax deductions on the cost of high-quality horses acquired for breeding.

The Committee has recommended that most of the amendments proposed in SOP 135 be incorporated into the Bill with some minor adjustments.

‍Commissioner’s extended powers
‍The Bill as introduced would enable the Commissioner of Inland Revenue to make minor changes to tax legislation without going through the parliamentary process. The Committee considered that a very cautious approach was warranted with respect to these powers to ensure that Parliament’s law-making authority was appropriately respected.

The Committee considered that this proposed change required further consultation with the Legislation Design and Advisory Committee before it was considered again by the Finance and Expenditure Committee. The Committee has therefore recommended the removal of the clauses that would give the Commissioner of Inland Revenue power to make minor changes to tax legislation.

‍Simplification of tax write-off rules
‍The Bill as introduced would allow for the write-off of tax debts when an individual had “complied with all of their obligations” or had less than $200 of income withheld at the wrong rate. The Committee has recommended that the provisions be simplified so a general write-off would apply when a person has only earned reportable income and the tax owing is $50 or less. The Committee has also proposed retaining two specific write-offs:

where the taxpayer’s only income is derived from income-tested benefits (for example, if WINZ payments were a person’s only source of income)
where the taxpayer had tax to pay as a result of having an extra pay period in the income year.

The Committee’s proposed changes would provide for a consolidated list of exceptions to the specific write-offs that was more prescriptive but easier to understand than in the Bill as introduced. The Committee has also proposed including flowcharts to clearly explain the process.

‍Correcting and finalising account information
‍Clause 21 of the Bill inserts new Subpart 3B into the Tax Administration Act. New s 22H would allow taxpayers to correct information that they have provided to Inland Revenue, while new s 22G would allow taxpayers who have had their tax position pre-populated to confirm the pre-populated information. Taxpayers who only earn reportable income such as salary, wages, and interest generally have very little interaction with the tax system and are likely to have their tax position automatically calculated by Inland Revenue.

The Committee considered that these taxpayers should not be subject to interest or penalties until after their terminal tax date if their tax is calculated incorrectly, and believed they should have an opportunity to amend incorrect information, not merely to confirm the pre-populated information. The new sections would allow both individuals and the Commissioner to finalise the information in accounts. The final account would be treated as the individual’s return of income and their assessment for the tax year. The date by when the information in the account must be confirmed is set out in s 22HB(3).

‍Increase in threshold for short-process binding rulings
‍Clause 61 of the Bill proposes inserting s 91EL into the Tax Administration Act to allow taxpayers with annual gross income below a certain threshold to seek short-process rulings on how a taxation law applies. In the Bill as introduced, taxpayers with a turnover of below $5 million could apply for a short-process binding ruling on how a tax law applies where the tax at stake was less than $1 million.

The Committee considered the $5 million threshold was too low as it could exclude medium-sized enterprises from the regime. The Committee has therefore recommended amendments to increase the turnover threshold to $20 million, provided the amount of tax at stake remains less than $1 million.

‍Bright-line test for residential land
‍The bright-line test requires people to pay tax on residential land if they buy and sell it within a specified period of time. The bright-line test for residential land was recently extended from two years to five years. This applies to land purchased after 29 March 2018.

The Committee noted several legislative anomalies remain.The Committee has recommended amendments to cls 250B-250K, 252B, 254, and 257B amending sections of the Taxation (Annual Rates for 2017-18, Employment and Investment Income, and Remedial Matters) Act 2018.

This would change the application dates for the bright-line test for freehold estates converted from leases with a perpetual right of renewal, and land that was purchased off the plans.For leases with a perpetual right of renewal (Glasgow leases) that are subsequently converted to freehold estates, the application date for the bright-line test is when the freehold interest was first acquired. The Committee considered that the application date should instead be when the leasehold interest was granted.

This would align the bright-line test with the treatment of Glasgow leases in other New Zealand tax legislation. When a purchase is made off the plans, it means that property has been bought before building commences. For these purchases, the bright-line test applies from the date when the land was acquired. The Committee considered that the application date should instead be when the contract to buy was first signed.

The Committee also recommended amendments so that the modified start date for the bright-line period for off-the-plan purchases applied to off-the-plan purchases of leasehold estates. Currently it only applies to freehold estates. The Committee considered that this should be extended to leasehold estates (which are commonly used for city apartments).

‍Payments to fire and emergency volunteers
‍The Committee has recommended amending s RD 5 of the Income Tax Act so that some fire and emergency volunteers would no longer be required to file separate income tax returns.

‍Hurunui/Kaikoura earthquake roll-over relief
‍The Committee has recommended inserting new s CZ 25B into the Income Tax Act to give roll-over relief to owners of revenue account property affected by the November 2016 Hurunui/Kaikoura earthquake.

‍Back-dated ACC payments
‍The Committee has recommended amending the Income Tax Act to remedy anomalies around the tax treatment of back-dated payments from ACC for attendant care.

‍Application date for KiwiSaver lock-in
‍The Committee has recommended amending cl 236, which would amend Sch 1 of the KiwiSaver Act 2006, to change the application date for changes to the KiwiSaver lock-in period transitional rule.

‍Information sharing with the Police
‍The Bill as introduced proposes allowing the Commissioner to share information with “a member of the New Zealand Police” as defined by the Policing Act 2008. This refers only to constables, who are police employees who have taken the constable’s oath. The Committee noted that many officers in the Police’s Financial Intelligence Unit are not sworn constables.

This unit would be the most likely recipient of information from Inland Revenue. The Committee therefore recommended amendments to allow the Commissioner to disclose information to authorised police officers regardless of whether they are sworn constables.