Tax changes mooted

Press, 19 December 1989, Page 26

Tax changes mooted

By

PATTRICK SMELLIE

in Wellington

Proposed new rules to prevent avoidance under the already complex provisional tax regime were released yesterday with the Government’s discussion document on tax simplification. The proposed changes strike, in particular, at the so-called “flip-flopping” method of avaoiding provisional tax. This involves swapping income between a company and an individual in alternate years to reduce provisional tax based on estimates of profitability in the year ahead. The three proposed changes are as follows: • Those paying provisional tax on the basis of estimated liability will pay ordinary interest from the first estimated provisional tax payment, instead of just the third, as at present: • Any interest that taxpayers receive from the

Government for overpayment of provisional tax will be assessable. Interest paid to the Government for underpayment will remain non-deduct-ible; • Taxpayers with more than $lOO,OOO provisional income in a year and more than 100 per cent increase in residual income from the previous year will be required to estimate their third provisional tax payment. This is termed “targeted estimation.” The chairman of the Tax Simplification Committee, Mr John Waugh, predicted some taxpayers would find problems with these suggested changes. “The Government is aware that some of the proposals will lead to increased compliance costs,” the Minister of Finance, Mr Caygill, said in the document. “However, the need to reduce avoidance opportunities is not inconsistent with the compliance cost

review. Both aim to get a tax system that is efficcient, equitable, and effective.” Part of the difficulty with the scheme was that innocent taxpayers could face higher tax and penalty burdens in the effort to stop tax avoiders. To minimise this, only ordinary rather than penalty interest rates would be charged for underpayment, the document said. Other areas canvassed for possible simplification included: • Aggregation of payment dates in such a way that it would not overload the Inland Revenue Department. Combined thresholds for PAYE and GST taxpayers were suggested as one way of reducing compliance costs for small businesses; • —Raising GST thresholds; • —Different treatment of the asseets of sole traders under fringe benefits tax (FBT), so that

major shareholders in private companies are not treated differently; © Improvement of the filing and payment systems for FBT; © Larger graduations for calculation of PAYE to save on compliance costs of extra calculation and publishing costs of longer tax tables; ® Ways of reducing amounts of record-keep-ing, and length of time records should be held; 0 Alignment of balance and tax payment dates; 0 Standardising and rationalising penalties, with introduction of a late filing fee as a less costly alternative to prosecution for late filing.

Lenient treatment for taxpayers who paid estimated tax with or before filing a late return could also be considered, the document said. The committee is seeking private sector submissions by February 8 next year.