6.1 There is a subtle interaction between a more digital world and simplification of the tax system. In a digital world data is cheap and, by comparison, people are expensive. This is a reversal where traditionally, data has been expensive and people relatively cheap.
6.2 This shift in relative costs increases the incentives for both taxpayers and Inland Revenue as tax administrator to adopt:
- Automated tax processes that do not require human intervention. Automation may not always require simplicity – computers are good at complex calculations. But it does generally mean eliminating complex judgements.
- Tax rules that may not require as much accuracy in the determination of tax liabilities because the cost of achieving complete accuracy, through human intervention, outweighs any tax saved (by the taxpayer) or tax collected (by Inland Revenue).
6.3 The intention is not to reduce tax liabilities but, by making changes that simplify tax or make it easier for external parties to automate tax obligations, reduce the burden of tax. This rationale drives our thinking in the following areas.
How tax laws are written
6.4 Legislation provides the foundation of the tax system. A goal in a more digital tax and social policy system would be legislation that has logical foundations and supports machine learning so that tax and payment calculation can be automated within external party systems.
6.5 This has implications for the way tax laws are written and the systems that taxpayers use.
Simplifying the year-end tax return
6.6 Much of the complexity of determining income tax arises from the end of year adjustments. These serve to bring net income into closer alignment with underlying economic income but involve more calculations. For some, mostly larger firms, the greater accuracy is worthwhile. But for others the adjustments are being made solely to comply with tax rules and the cost of any accuracy gain outweighs the tax benefit, especially as many adjustments unwind in the subsequent year.
6.7 A possibility would be to give taxpayers flexibility to adopt an approach that best suits their business. This would enable businesses to match their income determination to those required for other purposes (for example, aligning with how they determine GST liabilities). For some this will mean moving closer to a cash basis (though capital/revenue distinctions will remain for most assets). Entities would be able to choose the approach that they adopted with the proviso that moving between different approaches would be limited to prevent opportunistic switching to gain a tax advantage.
6.8 Another example of this approach could be asset depreciation. Currently, there is a detailed schedule of assets with different depreciation rates applying to each category.
6.9 Some firms with very specialised assets may want to continue using the detailed schedule. But many small businesses and their advisors would be comfortable with only a few categories of assets, such as: motor vehicles, buildings, plant and equipment with motors, other plant and equipment, other. A simpler schedule would make it easier to apply machine learning and automate the allocation of assets to the correct group. The rate applying within each category would be averages of the rates applying to individual assets in that category. There would not be an option of picking and choosing to minimise tax outcomes. The simplicity arises from lack of choice and the goal is simplification (and the ensuing compliance cost reductions) and not tax minimisation.
Systems for paying tax
6.10 Innovative products are providing different options for businesses to manage their finances and pay their taxes. These can give businesses greater comfort that the tax they pay during the year better matches their annual tax liability. For instance, providing a different mechanism for tax collection, say through an intermediary, could allow contractors to elect out of withholding tax or provisional tax.
6.11 New products will need to show they do not pose risks to the tax system, for instance by ensuring tax payments occur with an accuracy and frequency at least as good as current rules. Business models which simply defer payment to Inland Revenue will not meet the tests of tax integrity or improved compliance. Legislation may be needed to ensure that acceptable products are not constrained.
The role of system assessment
6.12 Traditionally, tax system design has focussed on either Commissioner assessment or taxpayer self-assessment of tax liability. A more digital world would not necessarily change the obligation on taxpayers to self-assess their tax liabilities. But with external parties playing a greater role in assisting taxpayers to comply with and determine their tax liabilities, two questions arise:
- Should taxpayers be protected in relation to a tax shortfall if they have followed the advice and calculation of the external party?
- What should the implication be for the external party who gets the calculation wrong?
6.13 One approach could be that the taxpayer has an obligation to take care to provide correct information while the intermediary becomes responsible for the interpretation of the tax law using the data provided. For example, the taxpayer provides a receipt to an intermediary for the purchase of a new computer, discharging the obligation to take care. The intermediary has the obligation to correctly code that expenditure as capital (a tax position). In case of an error in the information or the algorithm, the taxpayer would still have to pay any outstanding taxes. But the above approach to responsibilities would affect the party to which penalties are applied.
6.14 This issue is not new. For instance, there are rules in respect of employees whose tax obligations are not met because their employer does not return PAYE.
Sharing the certainty benefit
6.15 Much of the change proposed represents a move towards real time systems and away from end-of-year focussed systems. This raises a question about how long matters can be open to review by the Commissioner (the time-bar). This issue is complex but a reduction in this period could be appropriate for taxpayers complying with tax obligations in a speedier way because their tax is being determined in their natural system. No changes to review periods would be considered for those who remain in traditional systems.
Questions for submitters
- What factors do you think are important for the automation of tax calculations?
- What consequences should taxpayers face if there is a tax shortfall, but they have relied on the calculation of an external party?
- What consequences should external parties face if there is a tax shortfall because of taxpayers relying on the calculations within the system provided by the external party?