PROPOSED CHANGES TO INCOME TAX FILING REQUIREMENTS
The Taxation (Annual Rates, Returns Filing & Remedial Matters) Bill was released by the Government on 14 September 2011. The Bill proposes a significant number of changes, many of which are remedial in nature. Included in the proposals is a change to the existing position where a taxpayer who is not required to file an income tax return can pick and choose which income tax returns they file. In practice, this has meant that a taxpayer who has been under-taxed will choose not to file a return in a particular year, whereas a taxpayer who is due a refund will choose to file that return. This flexibility was introduced as part of the self-assessment changes introduced in the late 1990s. The removal of the requirement to file returns in certain circumstances was a key element of those reforms.
The effect of that existing policy is that the Inland Revenue Department is paying out significant amounts of over-deducted PAYE without collecting amounts of underpaid PAYE where taxpayers choose not to file those returns. Much of this activity has been driven by tax refund agents operating in malls and advertising on television which has encouraged a significant number of taxpayers who would otherwise not be required to file, to file tax returns.
The Bill proposes that from the 2015 income year, a four year rule will apply whereby a taxpayer who is not required to file income tax returns but chooses to do so, will need to file tax returns for the previous four tax years, in addition to the year in which they have chosen to file. It is proposed that the change would occur on a gradual basis until it is fully phased in by the 2019 income tax year.
Thus, if a taxpayer chooses to file an income tax return in 2017 to obtain a refund, they will be required to file their 2015 and 2016 returns as well.
How it affects you
At present, salary and wage earners are generally not required to file an income tax return, but can choose to do so. Often this choice is only made where there is an advantage to the taxpayer.
The effect of the proposals is that the taxpayer will need to determine whether, across a four year period, a refund still results, before choosing to file the relevant income tax return. The graduated introduction of the changes will lessen the compliance burden for taxpayers in these circumstances.
Low income earners and part-time workers will continue to benefit from filing income tax returns each year, as they are often over-taxed on the income they earn under the PAYE system.
GPG FIF EXEMPTION COMING TO AN END
When the new Foreign Investment Fund (FIF) rules were introduced for income years starting on or after 1 April 2007, a five year exemption from the FIF rules applied for taxpayers owning shares in Guinness Peat Group plc (“GPG”). GPG was previously exempt under the old FIF rules because it is resident in the UK which is a grey list country, and the FIF rules did not apply to shares in companies that were resident in a grey list country. GPG has a significant New Zealand shareholder base, hence why an exemption was appropriate for the first five years of the new FIF rules.
As a result of the exemption coming to an end, a legislative amendment is required to determine what the cost will be for GPG to allow taxpayers to determine whether the $50,000 de minimis exemption will apply when a FIF calculation is required in the 2013 income tax year. Remember that the de minimis exemption only applies to individuals. As such companies and trusts holding shares in GPG will be subject to the FIF rules in relation to that shareholding regardless of the cost.
Special rules already exist in the Income Tax Act 2007 to cater for situations where the cost of investments for the purposes of the de minimis rules is difficult to determine. At present, a taxpayer can use half of an investment’s 1 April 2007 value in place of its cost if it was purchased before 1 January 2000. The very nature of a GPG investment would make determining cost difficult, in that, each year the bonus issues undertaken by GPG increase a taxpayer’s cost and determining this value for someone who has held an investment in GPG for some time would be particularly difficult.
Accordingly, it is proposed that taxpayers will be able to take the market value of their interest in GPG at the start of the 2013 income tax year as the cost of the investment for the purposes of determining whether the de minimis threshold has been met. This will also be important for taxpayers who currently own shares in GPG and have other FIFs with a cost of $50,000 or less.
How it affects you
The fact that GPG will become subject to the FIF regime from 1 April 2012 means that a number of additional taxpayers will be subject to the FIF regime. This will most certainly give rise to further compliance costs for those taxpayers, and may result in greater income tax liabilities.
Owners of shares in GPG should be aware that the tax rules associated with that investment will be changing for the 2012 income year and may want to discuss the consequences of this with their financial advisor.