IRD officials are consulting interested groups on the future of tax administration. In their issues paper “Tax Administration in a Digital World”, IRD argues that it can do a lot more to remove the tax compliance burden from small business owners. But should it?

Tax Automation & Digitization is already here

Personal Taxes

If your only income is from employment, NZ interest or dividends, Maori authority distributions and employee share scheme benefits, then IRD issues your personal tax return automatically for each March year end. If you have less than $50 to pay IRD writes it off. If your tax to pay arises because of any extra pay period, IRD may write terminal tax off if it is less than their thresholds.[i]

If you are due a refund and have already advised IRD of your bank account, they will issue the refund automatically or ask you for more information.

Digital services via MyIR and accounting software packages

At 30 June 2021, 98% of tax returns were filed digitally. Now that IRD no longer accepts cheques, 98% of individual income tax payments were digital too.[ii]

If you use payroll software, your payday filing happens automatically in most cases, within 2 days of payment. This means that employee PAYE and earnings records are more accurate than before payday filing.

Accounting software like Xero and MYOB allows you to calculate and lodge your GST returns at the push of a button. Both Xero and MYOB are employing machine learning and optical character recognition to help you code your bills and banking transactions more accurately, making GST calculation faster.

Quick Roll out of Government Support

IRD was able to roll out new RSP and CSP application forms via MyIR within a very short time after Government’s announcements. The Small Business Cashflow Scheme loans were also available via MyIR, so small and medium businesses received a burst funds very quickly.

Taxpayers can apply for instalment arrangements to pay taxes via MyIR. Many of the straightforward arrangements are approved automatically. If you disclose in MyIR that your business was affected by covid-19, this is available to call centre staff, who can treat your situation with better understanding.

Where Does Tax Digitization Go from Here?

IRD has issued discussion papers and held focus groups on the future of tax digitization. JDW were fortunate enough to take part in one of those focus groups, representing the interests of small and medium businesses.

Seamless Income Tax Calculation

IRD imagines a fully automated tax calculation process, through the use of online accounting software. They see benefits of increased tax compliance and more regular income tax payments. For smaller cash-based businesses, they envisage that income tax can be calculated at the same time as filing GST. Software platforms like Hnry are already innovating in this area.

Income Tax Automation won’t suit Everyone

If you are a sole trader, and your only source of income is your business, then automation may work out just fine. But if this your side hustle, you also earn PAYE, investment or rental income, hold crypto assets, then the accounting software won’t have the full picture to calculate your income tax accurately during the year. Even if you granted MyIR access to your accounting software, it may still be an incomplete picture.

Fluctuating inventory, finance arrangements, even changes debtors and creditors, can impact on the calculation of business profit. If you have a company with multiple owners, allocate shareholder salaries based on taxable profit and other considerations, then the accounting software would need to be sufficiently robust to manage all that.

The Role of Accountants for Tax Preparation

We accountants favour a tax process which reduces compliance costs for our clients, especially for micro businesses and contractors. But we are cynical about whether tax preparation can be fully automated, given the confusion that already exists with clients and what they can claim for expense in calculating their taxes.

There will be some taxpayers who can’t access tax compliance software due to cost constraints, language, technology or accessibility limitations. They will still benefit from having a tax agent.

Accountants may have less tax work to do for smaller businesses, but will still be necessary for medium businesses with more complicated structures or transactions. Using GST as an example, we still prepare lots of GST returns for clients even though Xero and MYOB can calculate GST for people. We can free up more time for advisory work and business consulting, if we spend less time on compliance, so we won’t run out of work in a hurry!

Who Is Responsible for Getting Tax Right?

When you have a tax agent/tax adviser preparing your tax return, there is an expectation that they will have a duty of care, to interpret tax legislation and enter the correct figures in the tax return. If you overclaim expenses, you can be penalised for the tax shortfall, but the penalty is reduced if you relied on advice from a tax adviser.

Can a piece of software have a duty of care? If the software’s set of rules treats a purchase of a computer as an expense instead of a fixed asset to be depreciated, is the taxpayer at fault? Perhaps the use of tax software should insulate a taxpayer from penalties. Would that lead to taxpayers taking greater than usual risks with overclaiming expenses, because there are no consequences?  

Data Sharing

IRD already shares data with other Government agencies, for statistical purposes, social policy and the like. The discussion paper suggests that data could be shared with banks and credit agencies.  On the one hand, I feel a strong degree of discomfort about data sharing beyond current limits, without consent of the tax payer. One the other hand, if I was a potential lender or supplier to a taxpayer, I would want to know if there were large GST and PAYE amounts outstanding by the taxpayer, as it would affect their ability to pay loans or invoices on time.

Is Further Tax Digitization a Pipe Dream?

The scope for tax automation may be limited to a small sector of taxpayers, the contractors and micro-business owners. Early tech players like Hnry are showing that quite a lot is possible for that group of taxpayers, given the right conditions. But we should treat tax automation with a dose of cynicism. Automation can assist with clear rules, but can you rely on it to apply judgment? There is still a role for accountants as tax advisers and tax agents yet.

-         Serena Irving

Serena Irving is a director in JDW Chartered Accountants Limited. JDW is a professional team of qualified accountants, auditors, business consultants, tax advisors, trust and business valuation specialists.

You can read more about IRD’s future of tax digitization on their website[i]. The article does not include any focus group commentary, as the comments are not available for publication. A well-written article like this, which is general in nature, is no substitute for specific tax advice. If you want more information about the issues in this article, please contact the author.

  [i] https://taxpolicy.ird.govt.nz/-/media/project/ir/tp/publications/2022/2022-ip-tax-administration-in-digital-world/2022-ip-tax-administration-in-digital-world-pdf.pdf       
  [i] https://www.ird.govt.nz/income-tax/income-tax-for-individuals/what-happens-at-the-end-of-the-tax-year/income-tax-assessments/automatic-write-offs

[ii] https://www.ird.govt.nz/about-us/publications/annual-corporate-reports/annual-report/annual-report-2021/our-story-2020-21/digital-services-are-streamlining-customer-experiences