Chapter 2 - The Financial Reporting Bill and its consequences
2.1 The Financial Reporting Bill, currently before Parliament, proposes to reform the requirements of companies to prepare financial statements. This is part of a wider range of reforms that include the removal of the Financial Reporting Act 1993 requirements for companies other than large companies or companies that are issuers to prepare general-purpose financial statements.
2.2 However, this does not mean these companies will no longer have to prepare financial statements. Cabinet has agreed, as part of the process that led to the Financial Reporting Act rewrite, that it is appropriate that companies that no longer have to prepare general-purpose financial statements should continue to prepare financial statements expressly designed to meet Inland Revenue’s needs, but to a lower minimum level than general-purpose financial statements.
2.3 Further, Cabinet agreed that Inland Revenue should mandate this and should specify the minimum requirements for these financial statements, and that these statements could be special-purpose financial statements. While one obvious purpose of these financial statements would be to satisfy Inland Revenue requirements, they could also have other uses – both for management and owners, and for financiers and other creditors.
Inland Revenue’s current position
2.4 Inland Revenue is New Zealand’s biggest user of financial statements. Financial statements are the basis for taxpayers preparing the summary form – the IR 10 – of which 700,000 are filed each year by about 550,000 active businesses. This form is used for Inland Revenue purposes, but is also very important for Statistics New Zealand for business statistical purposes.
2.5 Inland Revenue regularly requests financial statements for compliance risk review, investigations and for debt collection. There are also occasions when financial statements of New Zealand taxpayers are requested by our tax treaty partners. Thus, for relevant taxpayers, it is reasonable for Inland Revenue to expect these taxpayers to prepare financial statements and to make them available upon request.
2.6 These requests will typically be under section 17 of the Tax Administration Act 1994. Subsection 17(1) presently allows Inland Revenue to request financial statements under its general powers. Subsection 17(2) currently contains an explicit requirement that companies must make available upon request: “balance sheets, … profit and loss accounts and other accounts, and statements of assets and liabilities”.
Tax Administration Act amendments
2.7 The new requirements could be set by way of Act of Parliament (legislation), Order in Council or Inland Revenue determination. A balancing act is required between ensuring that there is enough external review of the requirements before they are mandated, and ensuring that they can be amended in a reasonably flexible way. Orders in Council, which are approved by Cabinet, provide an appropriate balance.
2.8 Because requirements will be mandated by Order in Council there should also be sufficient flexibility to impose different requirements on different classes of taxpayer. An example would be the different requirements placed on individuals whose business income is schedular payments – refer below. Over time, the initial requirements can be refined and could lead to increased use of the flexibility that Orders in Council provide, following proper consultation.
2.9 The Tax Administration Act is being amended to create a framework for the Orders in Council under new sections 21C and 21D. This process explicitly includes a requirement for the Minister to be satisfied that consultation has taken place to ensure that private-sector views have been considered in the preparation of the requirements. As well, subsection 17(2) of the Tax Administration Act will be consequentially repealed.
2.10 These financial statements would not have to be held in hard copy, as long as they are prepared as part of the tax return process. Further, there would be no requirement to annually file these financial statements with Inland Revenue. Rather, as indicated above, they would form the basis from which the IR 10 is prepared and filed and they would be available to Inland Revenue upon request.
2.11 One of the eventual outcomes of this project is that the minimum reporting requirements will be consistent across similar types of taxpayers.
2.12 In suggesting that Inland Revenue mandate the minimum reporting requirements, it is not attempting to set itself up as an arbiter of accounting standards – this is not Inland Revenue’s role. Inland Revenue’s main interest is in the receipt of the correct amount of tax and compliance with its third-party obligations.