The government is floating the idea of businesses paying their tax on a pay-as-you-go (PAYE) basis, like individual taxpayers, in the biggest proposed shake-up of one of the building blocks of the income tax system since its introduction in 1957.
Revenue Minister Todd McClay announced the proposal to introduce a form of "business PAYE" among a raft of other possible reforms contained in green paper seeking public submissions by May 29 ahead of a rolling maul of public consultation documents he plans to publish over the next three years to modernise and simplify the tax system, while improving the rate and accuracy of tax collection.
Greater use of digital technology could see income tax obligations integrated into everyday business processes, although McClay acknowledged this had to be done in ways that minimised cost for small businesses and individuals who still rely on paper-based tax compliance.
Also up for review is the exemption in place since the 1990s that allows large numbers of individual taxpayers not to file a tax return at all if their circumstances are simple or they do not have tax to pay.
"Over time, this approach has created tension in the tax administration system between taxpayers who are not required to file, and those who are or who chose to do so in favourable circumstances (for example, to claim a refund)," the green paper says. "This creates fairness concerns for those who have to file and have tax to pay. Significant numbers of individuals are now either required to file returns or are choosing to do so.
"It is therefore timely to consider whether it is still desirable to keep as many individuals as possible from actively interacting with the tax system."
If digital technology could deliver an annual tax return that already contained the information received from employers, banks and other income sources for a taxpayer to check, compliance costs could be kept low while avoiding the potential for some taxpayers not to realise they should be filing tax returns.
"The only action required for the vast majority of customers would be to check and confirm their details. Where applicable, certain individuals would also need to report other income received - such as overseas income where there was no deduction of tax at source. International initiatives on the exchange of income information may also provide opportunities to provide overseas income details in the individual's tax statement.
The green paper also proposes major changes to the way provisional tax might be paid and to the calculation of withholding taxes on investment income, which will become an increasingly important source of revenue and tax obligations as taxpayers in an ageing population rely increasingly on investments rather than wages and salaries.
Using withholding taxes as a way to collect unpaid tax is also proposed, as is the potential to simplify compliance with fringe benefit tax through more real-time provision of information by employers to the Inland Revenue Department, which might allow tax obligations arising from fringe benefits, employer superannuation contributions and employee share schemes to be incorporated in the PAYE system.
Withholding taxes might also be applied to a wider range of industries, given that the range of activities covered by had not been reviewed since 1957, when both the PAYE and withholding tax systems were first put in place.
Also in the frame for reform is the complex array of tax obligations created for beneficiaries and recipients of government assistance through such programmes as Working for Families.
On business taxation, the green paper says the current system of requiring businesses to pay provisional tax, based on an estimate of current profitability, "can present cash flow difficulties for businesses, in particular, because of the nature of the current rules for new businesses."
New businesses effectively face a double-whammy of provisional and final tax obligations in their first two years of operation, which do not recur once the firm has established its record as a taxpayer.
"The calculation and payment of business income tax could be done more 'on-account' as income is earned during the year - much like a PAYE system for businesses," the green paper says. "One idea is by considering whether accounting profits with a few key adjustments, for example, reversing out capital gains and losses and excluding non-taxable income, could effectively be used as a better proxy for a business's end-of-year tax obligation.
"This has the potential to simplify the calculation of provisional tax and create more certainty for taxpayers and reflect cash flow."
Alternatives could include using a " a bespoke percentage of a business's turnover."
"Any review of the provisional tax rules would also have to consider changes to the standard uplift method of calculating provisional tax, together with the current safe harbour limits and use of money interest rules. A review of the tax pooling rules should also be undertaken to see if they can be improved and/or made available to more taxpayers," the green paper says.
On withholding taxes, the paper suggests that instead of reporting annually to their customers on tax obligations created by interest and dividends, banks and companies could provide the information straight to the IRD for inclusion in online documentation provided for taxpayers directly by the tax authority.
"Although there may be short-term costs for financial institutions and other businesses in order to provide this information, there are longer term benefits to those businesses and their customers - for example, more accurate and automatic withholding and increasing levels of compliance," the green paper says. "There will also be long-term benefits to financial institutions as tax is integrated into business processes."
McClay said the government plans to deal with tax administration and PAYE/GST rules, and withholding taxes on labour income this year, followed by initiatives in 2016 on investment income information, individuals' interactions with the IRD, and business taxation. Social policy interaction with the tax system would be tackled in 2017. Public consultation documents will be released for each area of initiatives.