 |
|
|
|
|
|
|
 |
|
|||||
 |
 |
 |
 |
 |
 |
|
 |
 |
 |
|
|||
| Archive - these pages are part of the continuing record of Executive Government - for the current Administration, see www.beehive.govt.nz |
|
|
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||
Threshold for payments basis for accounting for GST
5.89 An issue raised in submissions to the committee concerned the threshold for the automatic right to adopt the payments basis for accounting for GST, and whether it is set too low. Once taxpayers who are registered for GST exceed the threshold, they are required to adopt more complex accounting systems. A consequence of this requirement is a general increase in compliance costs imposed by the GST system.
5.90 The logical solution would seem to be an increase in the threshold. However, an analysis prepared by officials shows that increasing the threshold from $1 million to $2 million in turnover would provide a benefit to only 13,000 registered taxpayers, or 3 per cent of those registered. The present threshold allows up to 414,000 registered persons, or 92 per cent, to account for GST on a payments basis. In other words, while this measure would reduce compliance costs, the actual number of taxpayers who would benefit is small. An increase in the threshold would be warranted only with demonstrable compliance cost savings and no sufficient offsetting risk. There may also be a case for a small increase to account for inflation92.
5.91 The committee has identified some real risks associated with an increase in the threshold. Any increase would raise the potential for significant revenue risk through deferred settlement arrangements, that is, when the person acquiring goods or services pays on an invoice basis and the supplier accounts on a payments basis. The risk would be particularly acute with land transactions. The committee has also recognised the availability and sophistication of accounting systems which reduce the compliance costs imposed on people who account on an invoice basis.
5.92 Nevertheless, the committee inclines towards amendment in this area. One possible change that may not increase the risks identified, while still providing a benefit, would be to allow a longer time for the transition to the invoice basis for accounting.
5.93 It is important that people who are registered for GST should not suddenly discover that they have exceeded the statutory threshold for the payments basis for accounting for GST. Once this level is exceeded, taxpayers are no longer eligible to use the payments basis of accounting. Even an inadvertent breach leaves a registered person liable to shortfall penalties. The committee considered that such people should be eligible to continue to use the payments basis for at least a further year, thus recognising that exceeding the threshold might not be immediately obvious. Also, an opportunity should be provided for people to take whatever steps are necessary to decide on and implement the necessary systems changes. While this delay may mean that some people do not move directly to accounting on an invoice basis when they are able to do so, it would provide an appropriate breathing space for most.
5.94 The committee recommends that a registered person who is no longer eligible to use the payments basis of accounting should be able to continue accounting in that way for a further year before being required to adopt the invoice basis of accounting. The committee also recommends that the government should consider an increase in the threshold to account for inflation.
GST tax invoices
5.95 All small businesses incur compliance costs in ensuring that the documentation they hold to support a GST input tax claim is a tax invoice, as required by section 24 of the Goods and Services Tax Act 1985.
5.96 Evidence shows that a high proportion of the documents held by small businesses which purport to be tax invoices do not meet the statutory requirements. If the recipient of a supply does not take the time to get a proper tax invoice, or to get the supplier's authority to make changes that will convert the existing documentation into a valid tax invoice, he or she risks penalties for making an input tax claim without valid supporting documentation.
5.97 The committee considered ways to reduce this burden. The key constraint is that, for the GST system to work effectively, an audit trail is required. Relaxing the requirements could result in difficulties for the Inland Revenue Department in its audit activity.
5.98 There is an overriding expectation that the issuer of a document purporting to be a tax invoice should ensure that the document meets the statutory criteria. However, the integrity of the system depends in part on the recipient of a supply checking the adequacy of the supplier's documentation. In a self-assessment environment, taxpayers are considered to be responsible for their own affairs. Accordingly, it is appropriate that the responsibility for ensuring an invoice meets the required standard lies with the user of that invoice.
5.99 However, the committee considers that some action is required and, therefore, recommends that the Inland Revenue Department should publish a statement on its operational policy on GST tax invoices, identifying errors that are considered significant and errors that are not. This statement would provide recipients of supply with far greater certainty and should emphasise the underlying principle that tax invoices must provide a clear audit trail. A clear establishment of the principles involved would reduce the risks associated with this proposal.
5.100 The committee is also aware of the proposal under the present GST review that the threshold for accepting an abbreviated tax invoice for verifying an input tax credit should be raised to $1,000. The committee supports this initiative.
Increase in the threshold for tax invoices
5.101 The committee considered whether it should recommend an increase in the $50 threshold for requiring tax invoices to reduce the compliance costs associated with issuing, ensuring receipt of, and storing documents that meet the requirements for a tax invoice.
5.102 There is a risk to the government of exposure to falsified input tax credit claims. Because of this risk, some countries do not have thresholds at all. The committee considered the balance between reducing compliance costs and a possible increase in tax evasion through claims for fictitious deductions. The committee noted that the relatively low inflation over the last decade has meant little inflationary pressure to increase the threshold. Further, if there were to be an increase, the next logical step would be $100.
5.103 In the end, the committee steered towards retaining the present threshold because of earlier recommendations on the increased threshold for simplified tax invoices, and because of the potential risk to the revenue resulting from increasing the threshold to the next logical level. The committee recommends that there should be no increase in the $50 threshold for tax invoices.
Private use adjustments
5.104 Many businesses, being GST registered activities, own and use assets which also are used in part by the proprietors for their own requirements. Similarly, many proprietors use their own personal assets for business purposes. While GST adjustments for this secondary use are required in each taxable period, the level of adjustment is almost always minor. For accounting purposes, more often than not, the corresponding adjustments are calculated or implemented after year end, as part of the annual accounting wrap-up after balance date. Having two different adjustments, one during the year and one at year end, seems to impose unnecessary compliance costs.
5.105 The committee considered whether registered persons should be allowed to make private use adjustments on an annual basis in the GST return corresponding with the date of the annual income tax return.
5.106 There is no question that secondary use adjustments should be part of the GST system, but the compliance costs that would be involved in monthly adjustments seems unduly high when compared with the resulting benefit. A precedent is available for moving private use adjustments to the period in which the annual income tax return is filed. The annual adjustment for GST on entertainment costs is made in this way.
5.107 While the committee considers this measure would not be subject to abuse, the possibility does exist, and the committee considers that an appropriate limit could be introduced to apply in cases where the collective annual adjustment exceeded a threshold, say $5,000.
5.108 The committee recommends that GST secondary use adjustments for private or exempt use should be moved to the period in which the annual income tax return is filed except when the adjustment involves the procedures available for acquisitions of items under $10,000.
5.109 Unit trusts are trusts, but are treated by the tax system as companies. While legally trusts in form, the relationship between unit trust and beneficiary is very similar to the relationship between company and shareholder, as the trust units are purchased from the trust in the same way as company shares are purchased from companies. Thus, the two entities are closely substitutable.
5.110 In the case of ordinary trusts, the beneficial interests are created upon settlement, and the settlor and beneficiaries are different, that is, the trust corpus is contributed by someone other than the beneficiaries.
5.111 Tax treatment favours ordinary trusts because trust income is only taxed at one level in either the trustee's or the beneficiary's hands93. Company income is generally taxed at two levels, first, to the company as it is earned and, secondly, to the shareholders when it is distributed, with the imputation system preventing double taxation. However, when the company has not paid tax, it cannot attach imputation credits, and tax is then imposed on the distribution. Ordinary trusts are not taxed on the foreign-sourced income of non-resident beneficiaries. The scope of this relief is greater than the conduit tax relief recently enacted for companies.
5.112 It is because unit trusts have a commercial nature, and because they can generally be substituted for companies, that the government has chosen to apply the company tax rules to them to maintain the integrity of those rules, and to define exactly what tax treatment will apply when income interests, whether shareholder or beneficiary, are created by purchase or by capital contribution. Nevertheless, this treatment has created problems for managed funds, which face practical difficulties in applying company tax rules.
Foreign unit trusts
5.113 Difficulties arise in relation to foreign unit trusts. It may be suggested that New Zealand should apply the trust rules to unit trusts that have all non-resident beneficiaries and earn only foreign-sourced income. The trust income would not be taxed, as it should not be, because it is all foreign-sourced income earned on behalf of non-residents. Such treatment would act as an incentive for unit trusts to be managed in New Zealand.
5.114 While this may be the case, the system would then be faced with the difficulty of having to differentiate between unit trusts and companies. The pure flow-through treatment could raise the concern of New Zealand's tax treaty partners that New Zealand was being used as a tax haven, particularly if such unit trusts sought to use tax treaty benefits. This concern could affect New Zealand's negotiating position in tax treaties. While the committee accepts there are some potential benefits in using trust tax treatment for unit trusts, it also recognises that a legitimate concern arises with this approach in the terms of the integrity of the company tax rules and the reaction of tax treaty partners.
5.115 The qualified accruals rules are extremely important. However, for most people, they have proved very difficult to comprehend and apply. While changes to make the rules more accessible were included in the Taxation (Accrual Rules and other Remedial Matters) Bill, the committee considered two issues aimed at simplifying these rules.
Alternative approach to valuing financial arrangements
5.116 The committee was advised that work had been undertaken by officials on a year-end based valuation approach to accounting for financial arrangements, similar to the approach taken for trading stock. Under this approach, the valuation of financial arrangements would be based on the discounted value of future cash flows, with the income or expense for a given period based on the difference between opening and closing values adjusted for acquisitions and disposals.
5.117 The analysis of this option by officials found that substantial changes would be required to the Income Tax Act to accommodate this approach. On this basis it was concluded that the costs outweighed the benefits of a possible change in approach to accounting for financial arrangements. Officials were also concerned about the delays that any detailed analysis of this option would cause. This concern among other matters unfortunately meant that this issue could not be considered for inclusion in the Taxation (Accrual Rules and other Remedial Matters) Bill which was introduced in November 1998.
5.118 The complexity of the issues involved and the time available to the committee restricted its consideration of this approach to valuing financial arrangements. However, on the face of it, this approach may have merit. The committee recommends that this approach to valuing financial arrangements should be considered as part of the rewrite of subpart IH of Income Tax Act 1994.
Priority for the rewriting of accrual rules determinations
5.119 The committee in paras 2.191 to 2.196 considered the role of the accrual rules determinations under the qualified accrual rules. The committee concluded there that most determinations need to be rewritten.
5.120 When considering possible simplification measures for inclusion in this chapter, the committee identified the fact that the recommended rewriting of the determinations would represent a significant simplification measure. The committee therefore recommends that rewriting the accrual rules determinations should be given a high priority. While it recognises that the government must prioritise the use of its resources, the committee concludes that the determinations should be rewritten in the same style as the accruals legislation recently introduced into the House.
Readability of customer assessments and statements
5.121 To address an often-stated concern about the readability of Inland Revenue forms, the committee sought information on taxpayers' assessments of the readability and comprehensibility of statements and notices. The committee was particularly concerned about the quality of the existing statements of account. These statements can be confusing even for tax practitioners who frequently use them.
5.122 The information provided by the Inland Revenue Department gave the committee some confidence that the department is actively working to improve its statements and notices. A guide to the preparation of Inland Revenue forms is attached at appendix 4. The committee considers the list in that guide has merits, and that the Inland Revenue Department should apply these principles to all statements as soon as possible.
5.123 The reverse page of the statement of account should provide meaningful information on what taxpayers can or should do if they do not understand or agree with the position disclosed. Although not all matters in dispute will necessarily come within the disputes resolution process, the information should include some cautionary note about the time frames required in that process.
5.124 The committee recommends that priority should be given to the redesign of statements of account, the nature of the data disclosed, and the manner in which it is disclosed.
Internet access to Inland Revenue Department forms
5.125 The committee considered whether Inland Revenue forms should be made available on the department's website. The benefits of being able to download the forms when required would be considerable. The Inland Revenue Department has begun work on this goal, and the committee supports this work.
5.126 Some forms, however, such as the new employer monthly schedule and the various tax returns, require an actual Inland Revenue form to be filed for smooth administrative processing. For these forms, special inks and pre-coded items are used to facilitate electronic processing.
Taxpayer education
5.127 The committee considers that the Inland Revenue Department should publish more tax booklets targeted at specific industries94, and at specific common transactions95. Under self-assessment, this detailed information must be provided to taxpayers if they are to meet the standards of behaviour required by the rules governing compliance and penalties.
5.128 The committee recommends that Inland Revenue Department should publish booklets for specific industry groups, advising taxpayers of their tax obligations and the tax treatment of specific transactions.
Footnotes
92 The threshold was increased from $500,000 to $1 million with effect from 1 October 1990. Inflation adjusting the threshold based on September quarter Consumer Price Index information up to Septem-ber 1998 would increase the threshold to $1.16 million. Back
93 If trust income vests in a beneficiary in the income year in which it is earned by the trust or within six months after the end of the year, it is taxed to the beneficiary. All other trust income is taxed to the trustee. Subsequent distributions to beneficiaries of income which has been taxed to the trustee are generally not taxed. Back
94 For example, the restaurant trade, the building industry, the publishing industry and the retail sector. Back
95 Such as investing in a property offshore.Back
 |
 |
   |