Reforms may mean axe for provisional tax

The hated provisional tax system could be scrapped or simplified and there may no need for any employees to file tax returns under far-reaching moves to reform the tax system.
Accounting software firm MYOB said three-quarters of small businesses cited provisional tax as their number one tax bugbear.
Inland Revenue is planning to replace its 23 year-old First computer system in a series of projects that it warned last year could cost between $1 billion and $1.5b over 10 years.
Deputy commissioner of change Greg James said the Government agreed to the work on the basis it would transform the way Inland Revenue did business, not simply replace its technology.
The Government had told the department it was willing to assist with new legislation to make the tax system less complex, he said. “The Cabinet and Finance Minister Bill English have been quite clear with us in saying ‘come back and tell us what we need to do to’.”
Provisional tax was “absolutely” the kind of thing that could be scrapped as part of the “multiyear” transformation programme, James said. “We do want to push the boundaries and see whether we could achieve that, although there might be some good reasons why we can’t get that far.” At a minimum Inland Revenue would want to see provisional tax simplified, he said.
Revenue Minister Todd McClay said he would likely announce a new work programme aimed at simplifying the tax system at the annual conference of the New Zealand Institute of Chartered Accountants (NZICA), which will be held in Auckland on November 8.
“One of the things we will be consulting on is the ability to deal with tax on a ‘real time’ basis as opposed to assessing what people did last year and what they might do this year.”
McClay said it was “probably a bit soon to say we are going to get rid of provisional tax completely”, but it was a discussion he was willing to have and consultations were likely.
The focus of his November address is likely to be on new ways in which taxpayers will be able to deal securely and electronically with Inland Revenue and on an overhaul of the PAYE system. “As a PAYE payer today there are still times when you need to interface with Inland Revenue,” James said. “We see a time when that no longer becomes necessary; it is out of sight and out of mind and it is all done for you.” That could be the case even for employees who had other sources of income from the likes of rental properties, he said.
The slated cost of Inland Revenue’s technology overhaul has shocked many industry groups including the Institute for Information Technology Professionals, but improvements to provisional tax and PAYE could help sell the initiative to businesses.
A survey conducted for Business New Zealand in 2008 suggested businesses were spending more than $600m a year on tax compliance. Business NZ economist Stephen Summers said it was pleased Inland Revenue was looking at ideas to bring that down.
MYOB small business manager Scott Gardiner said the existing provisional tax system meant businesses had to forecast their future income and faced penalty interest if they got their estimates wrong. “It can be tricky for them to try to predict how things will go for them in the future.” Simplification of provisional tax was ‘number one’ in terms of what small businesses were asking for when surveyed, he said.
James said the changes brought about by the business transformation programme would be huge and would result in “a paradigm shift” in the way Inland Revenue operated. The department had begun consulting with NZICA about the opportunities and had had “very formative discussions” with Business New Zealand boss, Phil O’Reilly, he said.
A former senior manager at Inland Revenue speculated last year that the department might seek to axe about 1000 of its 5800 staff in order to stack up the business case to replace First.
But James said there was no reason to think employee numbers would have risen or fallen by the time the job was done. Inland Revenue – which also manages social policy initiatives such as student loans, Kiwisaver and Working for Families – would provide new services while axing others, he said. During the transformation it was likely Inland Revenue would need more staff.
Ministers had not sought, or been given, any advice on potential labour savings from the business transformation programme, he said. Nor had any further information been provided around costings.
NO IT CALL YET
Inland Revenue says it has yet to make any decisions on the technology or software it will use to replace its First computer system.
That is even though six years have passed since it completed its first review of the skills it would need to reduce its reliance on the mainframe system.
Recent work had given it a “clear handle in terms of our current state” and French consultant Capgemini had helped the department develop a “target operating model, so we know what our target operating model is for the future”, deputy commissioner of change Greg James said.
The transformation would be carried out in four stages, he said. The first would include a major overhaul of the PAYE system and the development of new secure communications, mobile “apps” and a website that would improve the ability for people and businesses to submit tax information to Inland Revenue electronically.
“The second stage will complete all remaining elements of the tax system. The third stage will deal with the social policy elements of the tax system. The fourth stage will complete that and put some of ‘the icing on the cake’ in terms of analytical tools.”
Inland Revenue is rumoured to have paid tens of millions of dollars for Oracle software licences at a time when it envisaged using Oracle’s Enterprise Tax Management suite to transform its business. Former commissioner Robert Russell told a select committee in 2010 that Inland Revenue envisaged “breaking new ground” by becoming the first tax authority in the world to deploy the suite “across all our array of responsibilities over the next several years”.
But James said it was “not at the point” of deciding whether that would still be its plan.
Inland Revenue copped flak from information technology lobby groups earlier this month after inviting only companies that had completed $100-million tax transformation projects overseas to express interest in carrying out the detailed design work for the first stage of its project and “validating” the three other stages. Critics said that effectively restricted the work to a few overseas consulting firms.
Paul Ramsay, co-chair of one of the lobby groups, NZRise, said there appeared to be a mismatch between Inland Revenue’s stated goals and its procurement processes.
NZRise’ members were concerned that by selecting from “one or two vendors” Inland Revenue would “pay through the nose for a monolithic system that is already out of date”, he said.
James said Inland Revenue had not determined whether the winning bidder would serve as a prime contractor and there would be many other technology and non-technology-related tenders, for example for development work and software testing.
Revenue Minister Todd McClay said there would be “a number of invitations expressed in the next little while that I expect New Zealand businesses to be quite interested in”.
Reference: http://www.stuff.co.nz/business/industries/9305897/Reforms-may-mean-axe-for-provisional-tax

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