Tax expert questions IRD tactics

Taxpayers will no longer be able to file tax returns only when they are due a refund from the IRD, under proposed changes being considered.

Currently, people whose income is taxed at source through the PAYE scheme do not have to file an annual tax return unless more than $200 is being deducted incorrectly.

But people can choose to if they think they have paid too much tax, for example if they have stopped working part-way through the year.

The proposal in the Taxation (Annual Rates, Returns Filing and Remedial Matters) Bill, now before Parliament, will stop this "cherry-picking" by requiring anyone who is filing for a refund to also submit a tax return for the previous four years and pay any tax owing.

An IRD spokeswoman said taxpayers would still be able to request information from the department on whether tax had been overpaid or underpaid during that period, and decide whether filing a return would be worthwhile.

The changes would apply from 2014.

Craig McAllister, tax director of the New Zealand Institute of Chartered Accountants, was in two minds about the changes.

He said the PAYE system was designed to tax people the correct amount. Intermediary companies offering to file tax returns only if clients had refunds owing - which appear to be in the firing line of these changes - were only exploiting a system that was not functioning exactly as it should.

He said there would not be many people who were owed a refund or had tax to pay and truly fitted the definition of those who did not have to file a tax return.

Many of the people who found they had been taxed incorrectly were those who should have been filing but weren't.

McAllister agreed that it should not be a "one-way bet". Those who found they needed to pay more tax should be required to file a return as much as someone who was owed money by the IRD.

But he said there were instances where the new rules could be seen as unfair. "But the other side is that PAYE is broadly designed in favour of over-taxing."

People such as students who worked part of the year, or someone who was made redundant part-way through, would pay too much tax.

In those cases, it seemed unfair that the taxpayer would have to bear the brunt of the compliance costs involved in filing returns for the four years prior. "[The PAYE scheme] is broadly designed to be correct," McAllister said. "Why should those previous years be disturbed? You are saying to these people 'if you want a refund, you have to incur the cost of filing the previous four years'."

He said businesses such as Taxrefunds.co.nz, which offered to file a tax return and charge a fee only if someone was due a refund, may have to rethink their businesses.

Taxrefunds.co.nz claims to have returned $162.4 million in refunds to its clients, for which it takes commission of between 12.5 per cent and 14.5 per cent.

Chief executive Phil Rance said his company had been talking about the proposal a lot. "Cherry-picking is advantageous for the client and allows us to ensure they get a refund."

Founder Geoff Matthews has said that the IRD was "philosophically antagonistic" to the tax-refunds industry.

But Rance said people who were owed refunds were usually owed them every year, so they would not be disadvantaged by the proposed change.

But those who would miss out would be people who received irregular lump-sum bonuses that pushed them into a higher tax bracket.

"They might have a $100 debt every year and then be due a $300 refund they'll never get because it won't be worth it."

Rance expected his revenue and workload might drop slightly, but said efficiency improvements the IRD was planning would offset some of the loss of revenue.

He said none of the online tax agents would charge for calculations to look at the previous four years' earnings and work out whether it was worth claiming a refund. He thought it would be a while before the change made a difference.