Requiring taxpayers who elect to file tax returns to file across the previous four years

(Clauses 88(12)(a)(ii), 106 and 108)

Summary of proposed amendment

The proposed amendment will require taxpayers who are not required to file tax returns, but who choose to do so anyway, to file for the previous four tax years, in addition to the year in which they have chosen to file.

Application date

The “four year rule” proposal will have a phased application. It will apply for the 2014−15 and later tax years. Under this phased approach, taxpayers covered by the proposed amendment who elect to file on or after 1 April 2015 would file for the 2014−15 tax year and would square up only for that year.

However, taxpayers covered by the proposed rule who choose to file for the 2015−16 tax year would also be required to file for the 2014−15 tax year if they had not already done so.

It is proposed that the application would continue in this manner until it is fully phased in by 2019. For the 2018−19 tax year, taxpayers covered by the proposed policy who choose to file for that year, would be required to also file for the previous four tax years (2014−15, 2015−16, 2016−17 and 2017−18), if they have not already filed for those years.

Key features

The four-year rule is intended to apply to taxpayers who are not required to file a return of income under the proposed new section 33AA of the Tax Administration Act 1994. Under the proposed rule, when taxpayers in this category of non-compulsory filers choose to file a return, they will be required to file returns for the previous four years, in addition to the year in which they have chosen to file. Taxpayers will still be able to check their overall tax position for the back years before filing their returns, as is the current practice.

This rule is also intended to be phased into application over four years.

Background

Currently, taxpayers who are not required to file a tax return, or be issued one by the Commissioner, can choose to have an assessment anyway.

Over recent years, there has been a significant increase in the number of taxpayers in this category choosing to have an assessment. For the 2004 tax year, approximately 200,000 taxpayers chose to submit a return, spread over 60 months. By 2007, the volume of taxpayer-requested tax filing reached 200,000 tax returns in just seven months.

This increase has been driven in part by an increased awareness of the ability for taxpayers to “cherry pick” the years in which they are due a refund of over-deducted PAYE withholding payments and then file in those years only. In the majority of cases they choose to not file in years when PAYE has been under-deducted.

The net result to the Crown revenue is that Inland Revenue is paying out significant amounts of over-deducted PAYE, without collecting amounts of under-paid PAYE.

The policy proposal to address this problem is to require taxpayers who are in the category of non-compulsory filers, and who choose to have an assessment, to file across the previous four tax years, with any over-deductions of PAYE potentially being offset by any under-deductions.

The proposal does not prevent taxpayers from seeking refunds of overpaid tax, but introduces more fairness into the system than currently exists.