Date posted: 1/12/2016 3 min read

Transforming New Zealand's Inland Revenue

Inland Revenue is undergoing a massive business transformation programme that will change the accounting profession in New Zealand forever

In brief

  • IR had two options — either update technology first and everything else after, or change technology, policy and process all at the same time
  • IR is making it easier to self-serve using digital services and will encourage the use of third party cloud-based accounting software to manage compliance directly
  • Compilation will essentially become automated, and advisory (including timely reviewing) will become our core role

By Scott Mason, FCA

Inland Revenue’s (IR) current FIRST computer system, which was state-of-the-art in the early 1990s, has become increasingly impractical and costly and there are difficulties adding functionality. Even if the government wished to introduce a capital gains tax or new social policy framework, I seriously doubt that the current system could handle it.

Furthermore, as life and the tax system have become more complex, it has also become more difficult and costly for businesses to manage their tax compliance, notwithstanding the technological developments available within business-owned systems. This seems counter-intuitive but is a reality.

IR had two options — either update technology first and everything else after, or change technology, policy and process all at the same time. They have chosen the latter so as to gain maximum upside from the process, making their transformation programme a massive undertaking, with wide-ranging consequences for the government, businesses/taxpayers, and tax agents alike.

Following on from successful trials, changes to digital services for GST are expected to be in place in early 2017, with changes to how income taxes are managed from 2018, and social policy from 2019. These dates are closer than they seem and, as a consequence, the impact on all parties from IR’s Business Transformation (BT) is happening now. Since March 2015, six Making Tax Simpler discussion documents have been released by the government, including Better Business Tax (April 2016) and Investment Income Information (July 2016).  A further paper on the Taxation of Individuals is near.

If you read the 2015 Making Tax Simpler green paper, you would have seen a change in policy focus from tax assessments being “dollar perfect” to “close enough”. Of course there are materiality controls, but this is a major change in tax policy direction for New Zealand which cannot be understated.  For example, the essence of the accounting income method (AIM) of calculating provisional tax payments is rooted in this philosophical change, although the extent of “approximation” has yet to be determined. BT has been accompanied by significant legislative change directed towards simplifying tax rules, especially for SMEs, which should be commended.

Assuming better quality and more timely data collection via new communication mechanisms (eg live chat), new information sources (including from land transactions, automatic exchange of information arrangements and new withholding tax rules), and direct data connectivity via accounting systems, thought has also been given as to how proactive the tax system itself can be. Imagine a tax system that can be tailored to your clients’ business cash-flows, to the extent that assistance/support could be automatically triggered (ranging from uploading “adjustments” to discussions around the ability to pay tax), or even timely feedback about certain tax treatments.

There will be both learnings and teething issues with the roll-out of such a complex system and the myriad of policy and mechanism changes being introduced to support BT. I anticipate increased but targeted review activity being instigated by IR, given the dramatic changes to tax rules, and IR’s future analysis of the better quality of information flowing to them. Although I would expect a measured IR approach to such given the degree of change, accountants should consider whether their clients should be offered tax audit insurance, such as Audit Shield, in order to avoid any unplanned professional fees which may arise as a result.

In summary, IR is making it easier to self-serve using digital services and will encourage the use of third party cloud-based accounting software to manage compliance directly. GST returns and ultimately income tax returns will be generated within these systems and electronically submitted. These changes will alter the accounting profession in New Zealand forever. Compilation will essentially become automated, and advisory (including timely reviewing) will become our core role. To ensure our survival as advisors, we must upskill and embed ourselves (usefully) within our clients’ regular reporting cycles, and provide them with value-add services regularly throughout the year, including tools like advisory boards, benchmarking and tax pooling. Now is the time for all accountants to start thinking about their future, and how they can reinvent themselves to meet the brave new world head on.

Scott Mason FCA is managing principal of tax advisory for Crowe Horwath Australia and New Zealand and a member of CA ANZ’s Tax Advisory Group.

This article was first published in the December 2016 issue of Acuity magazine.

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