Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill: Have your say on provisional tax changes

Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill: Have your say on provisional tax changes

Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill: Have your say on provisional tax changes 1200 630 Lee Stace

Image: Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

The Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill contains six amendments that IRD says will clarify and align provisional tax legislation with its system.

The proposed amendments are:

  1. Eliminating the requirement to estimate at the final instalment date for provisional tax
  2. Clarifying the ‘lesser of’ calculation of interest for standard uplift taxpayers
  3. Clarifying the application of late payment penalties applicable from the final provisional tax instalment date.
  4. Removing the ability for taxpayers to choose the provisional tax instalment to which a payment is applied.
  5. Clarifying the way in which provisional tax is truncated to whole dollars
  6. Non-standard provisional tax instalments.

These appear to be mainly positive for taxpayers.

However, number four one which may upset some as it has the potential to expose taxpayers to more IRD interest and late payment penalties.

What the changes in the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill mean

Below we explain how each proposed amendment will affect provisional taxpayers. We also reference the relevant clause(s) in the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill.

1. Eliminating the requirement to estimate at the final instalment date for provisional tax

Summary

IRD says this amendment will allow taxpayers using the standard method to pay an amount lower than uplift at their final instalment if their RIT for the year is going to be less than forecast, without having to switch to the estimation method.

IRD will do this by adding another formula to sRC10 Income Tax Act 2007 which deals specifically with the final instalment for uplift taxpayers. The formula is: RIT estimate – tax paid.

They say this will reduce the compliance cost for taxpayers as they won’t have to switch from standard uplift to estimate at the final instalment if their liability for the year is going to be lower than forecast.

IRD also confirms taxpayers who switches to estimate at any time during the year will not be able to use the interest concession rules in s120KBB Tax Administration Act 1994. They will fall under s120KB of the Act and potentially be subject to IRD interest from the date of their first provisional tax instalment if they do.

Application date

The proposed amendment would apply from the 2019-20 income year.

Relevant clauses of the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

Clauses 110 and 125(4).

TMNZ’s view

We support this amendment.

Many of our clients are already lowering their final instalment payment when their RIT for the year is going to be lower than forecast, without filing an estimate after the second instalment.

Removing the legislative requirement for them to do so by including a new formula in sRC10 Income Tax Act 2007 that deals specifically with the final instalment in these situations makes sense.

2. Clarifying the ‘lesser of’ calculation of interest for standard uplift taxpayers

Summary

This clarifies and legislates what happens with IRD’s interest calculation as it pertains to s120KBB Tax Administration Act 1994 when a taxpayer goes from basing their standard uplift payments on 110 percent of their RIT from two years ago to using 105 percent of the previous year’s RIT.

This was covered in TMNZ’s guide Calculating Provisional Tax Using the Standard Uplift Method.

Under IRD’s system, once a taxpayer files the previous year’s return the 105 percent uplift calculation becomes the basis for all remaining provisional tax instalments for that year. They also apply this retrospectively to any previous instalments if the uplift amount due using this calculation is lower.

In other words, the 110 percent uplift calculation no longer exists once a taxpayer files the previous year’s return.

However, there is an exception to this rule.

In instances where the 105 percent uplift payments are greater than 110 percent uplift payments, a taxpayer retains the ability to use the lower uplift amount at the earlier instalments paid/due before the previous year’s return is filed.

This is because it is unfair to retrospectively penalise a taxpayer for a liability that was unknown at the time.

IRD’s legal team deems the legislation in its current guise is not clear on any of this.

Application date

The proposed amendment would apply from the 2018-19 income year.

Relevant clauses of the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

Clauses 109(2) and (3).

TMNZ’s view

We support this change as there is no mention in the current legislation of how the uplift amount due at instalment can be impacted after a taxpayer files the previous year’s return.

It was only when we sought clarification from IRD’s policy team when preparing our uplift guide that we were notified of how things works.

This amendment clarifies for taxpayers what IRD is doing operationally.

3. Clarifying the application of late payment penalties applicable from the final provisional tax instalment date

Summary

This will align legislation with IRD’s system to ensure late payment penalties for taxpayers using standard uplift method are only calculated on the instalment amount due at the final provisional tax instalment – not the total outstanding tax liability for that date, which is currently the case.

The basis for the late payment penalty at the final instalment is the lesser of:

  • The uplift amount.
  • A third of the taxpayer’s RIT for the year.

This is consistent with how IRD charges late payment penalties at the first and second instalments as per s120KBB (3)(b) Tax Administration Act 1994.

Please note IRD interest will continue to accrue on the total tax liability outstanding at this instalment.

Application date

The proposed amendment would apply from the 2017-18 income year to provide certainty to taxpayers.

Relevant sections of the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

Clauses 124 and 130.

TMNZ’s view

We seek further clarification from IRD.

While we understand IRD does not want taxpayers unfairly penalised at the final instalment, we would like to know how and/or if IRD would apply late payment penalties in a situation where a taxpayer pays the standard uplift amount due at their first and second instalments, but whose RIT for the year turns out to be lower than forecast.

We are concerned about an unintended consequence of a taxpayer in this situation incurring a late payment penalty that does not correspond with the amount due to settle the liability for the year.

4. Removing the ability for taxpayers to choose the provisional tax instalment to which a particular payment is applied

Summary

This removes the ability for taxpayers to allocate a provisional tax payment to an instalment of their choosing. Instead, IRD says the commissioner must allocate the payment(s) to the oldest overdue provisional tax first.

IRD argues that prior to the interest concession rules for standard uplift taxpayers and removal of the incremental one percent monthly late payment penalty it was beneficial for taxpayers to apply the payment to the oldest debt first.

However, since introducing these changes, a taxpayer might now “inappropriately apply” the payment to more recent debt to avoid late payment penalties.

In addition, IRD says the configuration of its system prevents it from allocating payments to a provisional tax instalment of a taxpayer’s choosing.

Application date

The proposed amendment would apply from the 2018-19 income year. However, for taxpayers who previously have requested and obtained a payment direction, IRD says a savings provision will preserve this treatment.

Relevant clause of the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

Clause 126.

TMNZ’s view

We do not support this amendment.

IRD fails to illustrate in the commentary the impact this will have on a taxpayer in terms of incurring further interest and late payment penalties at future instalment dates.

It is our view that taxpayers will be worse off if IRD applies payments to the oldest debt first. Please refer to the example below

Example

A taxpayer forgets to pay their uplift instalment of $54,755 on 28 Aug 2018 (P1). They instead pay $109,510 on 15 Jan 2019 (this being two-thirds of their uplifted RIT from the previous year).

On 7 May 2019 (P3), the taxpayer pays the uplift amount of $54,755 because they feel this is the final balance to settle the liability for the year. They later confirm the RIT for the year is $164,265.

Currently, if they asked IRD to apply the entire 15 Jan 2018 payment to P2 (as per s120L Tax Administration Act 1994), the taxpayer will only be liable for the LPP for the missed P1 payment, plus 140 days of IRD interest*. This works out to be:

  • LPP: $2759.65
  • Interest: $1809.26
What will happen under the proposed amendment

However, under IRD’s proposed change, the commissioner would allocate a portion of the $109,510 paid at P2 to the LPP and core tax owing for P1.

This means at P2 the taxpayer will have a shortfall of $2759.65. This equates to LPP and interest at P2 of:

  • LPP: $139.08
  • Interest: $72.93

As the $54,755 payment made at P3 is required to cover the LPP and core tax owing for P2, they will have a shortfall of $2898.72 at this date. Therefore, they will have LPP and interest for P3 of:

  • LPP: $146.08
  • Interest: This continues to accrue on the final balance remaining to settle the liability for the year (plus the LPP from above) until the taxpayer pays this off.

So, rather than only having LPP and interest at P1, the taxpayer is also now liable for this at P2 and P3.

*The IRD interest rate in this example is 8.22 percent.

IRD acknowledges compounding interest and late payment penalties do not lead to greater taxpayer compliance. It’s why they removed the monthly incremental one percent late payment penalty on income tax. This amendment runs counter to this.

We believe the late payment penalties and interest for the missed instalment is punishment enough for the non-compliance. So too is not being able to use the safe harbour concession (applicable for taxpayers with RIT of less than $60,000) in s120KE (1) and (2)(a) Tax Administration Act 1994 due to not paying the uplift instalment on time or in full, therefore being subject to IRD interest from the final instalment date on the remaining balance to settle the liability for the year.

This amendment means the taxpayer is being punished multiple times as they are exposed to compounding interest and late payment penalties.

5. Clarifying the way in which provisional tax is truncated to whole dollars

Summary

IRD’s legal team feels that the way in which its system currently truncates instalments to whole numbers is not consistent with the legislation.

As such, this amendment confirms that when IRD’s system truncates provisional tax amounts to whole numbers, IRD will deem payment of those whole dollar amounts (rather than the amount including cents) to meet the requirement to take advantage of concessionary provisions such as safe harbour.

For instance, if the instalment amount due works out to be $5000.33, then IRD will truncate the payment to $5000. If a taxpayer pays this amount when it is due, they will be deemed to have met the liability.

Application date

The proposed amendment would apply from the 2019-20 income year.

Relevant clause of the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

Clause 110.

TMNZ’s view

We support this amendment.

We have heard stories from clients about taxpayers being prevented from using the safe harbour provision because they did not pay the cents (or rounded the instalment amount payable down).

That meant they were subject to interest from the final provisional tax instalment on the remaining balance required to settle the liability for the year.

In one instance, a taxpayer underpaid their standard uplift instalment by 30 cents and received a $2400 IRD interest bill.

We believe that cost is disproportionate to the error made and welcome any change that ensures taxpayers are not unfairly punished or prevented from using the safe harbour interest concession.

However, we do not agree the amendment should apply from the 2019-20 income year. We believe it should be applied retrospectively from the 2017-18 income year as this aligns with when the current safe harbour interest concession rules came into effect.

6. Non-standard provisional tax instalments

Summary

This alters s139B (6)(bb) Tax Administration Act 1994 to account for taxpayers who have a non-standard number of provisional tax instalments.

At present, the wording in the section only deals with three-instalment provisional taxpayers.

IRD acknowledges taxpayers with more or less than three provisional tax instalments were not correctly dealt with in this section after the interest concession rules we added to legislation.

Application date

The proposed amendment would apply from the 2019-20 income year.

Relevant clause of the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

Clause 129.

TMNZ’s view

We support this amendment.

This is minor change that addresses a drafting error that was missed when the provisional tax rules were re-written a couple of years ago.

Further information on the Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill

Submissions for Taxation (Kiwisaver, Student Loans, and Remedial Matters) Bill close on 4 September.

You can find full commentary on the Bill here. The amendments pertaining to provisional tax are on pages 55-67.

To view the Bill itself, click here.

Have your say

If you wish to provide feedback on any of the topics above, TMNZ is putting forward a submission that consolidates the feedback of all our clients.

This is your chance to make a real difference. Email news@tmnz.co.nz before midday on Monday 2 September to have your say.

Lee Stace

A former journalist, Lee Stace is the PR and Content Manager at Tax Management NZ.

All posts by: Lee Stace

X