1.1 New Zealand is fortunate to have a tax system that works well. New Zealanders have access to high quality public services, funded by a tax system which strives to simplify requirements and to minimise costs.
1.2 The system works well for individuals who have employment and investment income which is subject to withholding and reported to Inland Revenue during the year. For them, tax assessments are largely automated.
1.3 The Government’s investment in Inland Revenue through its Business Transformation programme has improved administration of the tax and social payments system as well as enabling further improvements through a more digital system.
The case for change
1.4 While the tax system works smoothly and efficiently for most earners, it works less well for people with a variety of income sources including those who receive benefits through the tax system, or for small businesses.
1.5 Working better would mean being more effective at collecting tax, being fairer by ensuring everyone pays the tax they should, ensuring people receive the payments they are entitled to, lowering overall cost for operating the system, and making more contribution to wider economic goals. These are consistent with the Government’s long-term objective of a tax system that is fair, balanced and promotes the long-term sustainability and productivity of the economy.
1.6 The way business operates is changing to become fully digital. This is more than transactions happening online. Digital is becoming the complete and “natural system” for businesses. This means tax calculations can be embedded in the software businesses use and tax can become an automated process that happens as a by-product of other processes.
1.7 Inland Revenue’s Business Transformation programme – the modernisation of its systems and how taxpayers and other parties interact with them – is nearing completion. Business transformation has digitised Inland Revenue and enables Inland Revenue to transact digitally with taxpayers and their representatives. It has created the platform for further development of a digital tax system.
1.8 These factors led the Government to include an examination of tax administration on its 2021 tax policy work programme. Inland Revenue has led this work so that it can advise the government.
A fully digital system
1.9 Businesses are moving online and this shapes our thinking about the future world in which the tax system will operate. Key features of this world are likely to be:
- Businesses operating in a digital ecosystem – that is, they’re connected digitally to their suppliers and customers.
- Administration of tax and social policy payments integrated into broader economic systems, for instance individuals or businesses can use a common digital identity across a range of services.
- Tax administration processes embedded in the natural systems businesses are using, that is, the systems that businesses use to suit their business rather than to suit tax obligations.
- Digital processes enabling data to flow in real time.
1.10 Further features of this future tax administration could include:
- Taxpayers granting and managing consents to the party or parties they want to represent them or manage their tax affairs and with whom they are comfortable having their data shared.
- Processes being streamlined through there being one source of truth for data and information. Rather than there being separate data repositories that need to be reconciled, participants would access this data when needed.
- Increased partnering between Inland Revenue and the external parties who provide the apps and services that taxpayers will use.
The potential benefits
1.11 Greater automation of tax obligations is likely to mean better compliance because compliance improves when paying tax is the easy thing to do. It is harder to get it wrong or for taxpayers to manipulate the data. It will also mean lower compliance costs, and less stress and risk for taxpayers, and lower administration costs for Inland Revenue.
1.12 Also, the integration of tax and payment systems into broader economic systems will create value throughout the economy through more efficient processes or through providing a spur to innovation.
A suggested route to get there
1.13 Moving to a more digital tax and payments system will involve a series of steps. It will build on developments already underway such as businesses operating their management systems digitally and tax calculations being embedded in the software businesses use.
1.14 Over the next decade, officials believe further changes for tax administration will be most pronounced for the small business sector – that is the self-employed, micro and small-medium businesses. For individuals receiving wage and salary income and investment income where PAYE and resident withholding tax are deducted, tax is already largely automated. Large businesses are adopting digital processes, but their affairs and tax are sufficiently complex to require a mixture of automation and manual intervention.
1.15 Developing digital natural systems within social policy is more complex as this is not the target market for third party innovation. However, business models are emerging that help with the transition to work or that focus on budgeting support with the payback being fewer debt issues to manage downstream. Potentially, social policy interventions that reduce costs to society could be considered for Government subsidy, as occurred previously with payroll software.
1.16 The needs of taxpayers, social policy customers, and businesses vary. What functions as the natural system for one may not work for another. The trend towards tax occurring in natural systems will be driven by innovation in the private sector developing products and services that meet customer need. In turn, this will mean greater external party involvement in the tax system with Inland Revenue’s focus being one of facilitation, third party support and standard setting.
1.17 While we see a greater involvement of external parties, for reasons of skill, privacy, or cost some taxpayers will want to deal directly with Inland Revenue. Inland Revenue will continue to serve them. Similarly, social policy customers, whose affairs can be complex and personal, may also wish to continue a direct relationship with Inland Revenue. Having a direct channel to Inland Revenue puts appropriate pressure on the private sector to make sure their service offerings truly innovate and add value as customers will always have the option of managing their own affairs.
How this fits with other processes
1.18 The administration of the tax and transfer system comprises many dimensions such as policy, operations, design and delivery. In total, these relate to Inland Revenue’s strategy as administrator of the system. Moving forward will require evolution in all aspects of Inland Revenue’s strategy.
1.19 This issues paper focuses on these policy elements that could, if not addressed, be potential blockages to achieving a more digital system:
- The regulatory framework applying to external parties, including intermediaries and other entities which interact with the tax and payments system.
- The rules, frameworks and scope of data sharing.
- How tax legislation could support a more digital future.
Scope
1.20 Tax and transfer administration is a broad topic. It covers the way taxpayers determine and pay their tax obligations, and understand and receive their social policy entitlements. It includes actions taken by Inland Revenue and third parties that facilitate or enforce these processes.
1.21 This issues paper does not look at all aspects of tax and social policy administration. Its focus is where policy changes, potentially leading to legislative changes, will be required to give effect to a more digital tax system. This means it does not address these issues:
- Changes to rates and bases: bases refer to who faces a tax obligation or is entitled to a benefit, while rates refer to how much tax or benefit they pay or receive.
- Digital developments in other parts of Government – a separate exercise is considering potential opportunities to leverage opportunities from business transformation to support a unified Public Service.
- Administrative functions where a more digital world is not having an impact, such as processes relating to ruling and disputes.
1.22 This paper outlines themes and directions. As ideas evolve, specific policy initiatives will be developed and proposed to the Government for inclusion in the tax and social policy work programme.
About this consultation process
1.23 The policy issues covered in this issues paper are complex. There is a potential to solve current problems but also create new issues and risks. A steady and careful pace of change allows management of risks as they arise.
1.24 This issues paper builds on the engagement we have already had with many parties involved in the tax and transfer system. It sets out key themes identified from that engagement and from reviewing international developments. This engagement will be ongoing.
Making a submission
1.25 This issues paper is an invitation to provide feedback. We have included questions as prompts for this feedback, but you are not limited to these questions in how you respond.
1.26 Please send your feedback to [email protected] with “Tax Administration in a Digital World” in the subject line by 31 March 2022.
1.27 Alternatively, or in addition, we are happy to meet you if there are issues you want to discuss.
1.28 Submissions may be the subject of a request under the Official Information Act 1982, which will result in their publication unless there are grounds under that Act for the information to be withheld. The withholding of responses on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. If you consider that any part of your submission should properly be withheld under the Act, please clearly indicate this.