New Zealand Tax System - Report Example

Running Head: New Zealand tax system New Zealand tax system (Insert Name) (Insert Course) (Instructor’s Name) (Institution Name) 23rd September 2011 Introduction Inland Revenue Department (IRD) is the government authority that is responsible for collection of taxes in New Zealand. The major taxable incomes are rental income, self-employed and business income, wages and salaries, overseas income and income from investments including dividends and interests. The tax year in New Zealand runs from 1st April to 31st March. In order to ensure adequate tax is collected from all income earners all employed New Zealand residents should posses an IRD number (Dalziel, 2002). The IRD number which is given to the employers by the employees ensures that the right rate of tax is paid by the employees. Without an IRD number an individual pays a higher tax that he or she is supposed to pay. Pay-As-You-Earn (PAYE) is a system adopted by the government which ensures that the tax is deducted on the employees earnings before there are paid. This ensures that all the salaries are taxed and the government collects adequate tax from all the employees’ salaries. In addition to the PAYE scheme, the ACC levies are deducted from the salaries. These levies give an insurance cover to the income earners. The insurance covers an employee if he or she is involved in an accident outside the working places. In addition, it allows employees to benefit from rehabilitation and various health cares. This paper seeks to discuss various aspects of New Zealand tax system. Adam Smiths four canons of taxation Adam smith, a renowned political economist developed canon of taxation that was the basis of judging the taxes. One of the major aspects of the taxes is that they contribute to a sound public finance that is required for the growth of an economy (Hoffman and Kathryn, 1994). This section analyses the four canon of taxation and other principles of taxation as discussed by various economists. Canon of ability to pay The canon of ability to pay stipulates that individuals should pay tax depending on the level of their incomes. There should be equality of sacrifice this means that high income earners should be subjected to high taxes. Canon of ability to pay emulates the progressive tax rates which states that tax should be decreased with a decrease in the level of income and vice versa. In the case of New Zealand, the government adopted new tax rates on May 2010, which ensured that income earners paid taxes depending with the amount of income they earned. This was aimed at achieving a productive economy and adequate revenue was collected. The table below indicates the income level and the tax rate adopted by the New Zealand tax system. Income Tax rate $0 – $14,000 10.5% $14,001-$48,000 17.5% $48,001-$70,000 30% Above $70,000 33% No notification rate 45% From the table above it is clear that as the income of an individual increase the tax rate increases an aspect that satisfies the canon of ability to pay as stipulated by Adam Smith. Canon of certainty The canon of certainty maintains that the tax payers should be assured of the amount of tax they are supposed to pay to the tax authority. Being aware of the total amount of tax an individual is supposed to pay, is an important aspect since it allows the tax payer to make adjustment on his or her income in order to cater for the tax liabilities. When a tax payer is certain of the tax payable he or she is able to pay. In the same way, the tax authority is aware of the estimated tax to be collected. This is important especially when the government is making its annual budgets. IRD provides adequate information which makes it possible for the tax payers to compute their taxes (OECD, 2007). For example, companies pay 28% tax on their profits while individual tax payers use income bracket to compute their taxes. Cannon of convenience The cannon of convenience stipulate that tax should be collected in a manner that is convenient to the tax payer. New Zealand property tax, house tax and income tax are levied at the time when the tax payers are expected to receive their income (De Veirman and Dunstan, 2008). In the same way, canon of convenience argues that the manner of payment of tax should be convenient to the tax payers who pay their tax through cheques. Canon of economy According to the canon of economy, the expenses incurred during the collection of taxes should be little. In addition, the collection process should be in line with the administration policies. For example, if high salaried tax personnel who are paid major parts of the tax to cater for their salaries, such a tax is considered to be uneconomical. One of the major approaches which the New Zealand tax authority has adopted to make its tax system economical is by introduction of PAYE scheme that allows employers to deduct the tax from their employees at the tax point. Other characteristics of a good tax system Canon of productivity Under the canon of productivity a tax should produce enough revenue to cater for the government expenditure. If a large number of taxes which are expensive to collect generate insufficient revenue as compared to few taxes, then the few taxes should be preferred. In this way, the extra cost of collecting the large number of taxes is avoided Canon of elasticity According to the canon of elasticity tax system should be flexible implying that if the government requires more funds, it should be possible to achieve more revenue without increasing additional expenditure during collection. Examples of elastic tax include postal rates, income tax and fares charged by trains. Canon of simplicity According to this canon, tax system should be easy to understand by the tax payer. This implies that it should be simple and complications which may result into corruption avoided. The role of income tax One of the major roles of income tax is wealth redistribution. Due to the difference in the accessibility of capital, best education and high salaries that exists among the households, inequality in the distribution of wealth is inevitable. Poverty level among the low income earners is one of the major factors that contribute to slow growth of the nation economy and political instability. This is caused by the social unrest which is caused by the poor people as they seek better services from the government (Parkin, 2006). Based on the fact that the poor also contribute to the growth of a country, social disputes such unrests slow down the rate of production of goods and services, an aspect that affects all members of the society. In order to ensure equitable distribution of wealth in the modern mixed economies, the governments have embarked on provision of services and public goods as well as collection of taxes. Income tax is an example of a direct tax. Direct tax is paid direct to the government by the tax payers. Income tax is directly imposed on the income tax and it cannot be legally avoided since it is imposed directly on the income of an individual. Income tax is also used as a policy tool in demand side. In this case, the government varies the level of tax imposed in order to adopt effective aggregate demand that will ensure an economic growth. This policy is mostly applied by a Keynesian government. In the same way, income tax is also used in a supply–side as a tool to make people work harder. This is achieved by lowering the tax in order to motivate the tax payers and enhance their productivity. By lowering the tax, entrepreneurs are encouraged to increase their investment since they are left with a higher profit after tax. As a result the level of investment and employment increases resulting to reduced poverty level (McCluskey et al, 2005). Role of consumption tax Consumption tax refers to the tax that is imposed on services and goods that are consumed by households. It is an indirect tax since the consumer pays the tax at the time of purchase. Examples of consumption taxes are value added tax, sales tax and excise tax. Consumption taxes are grouped into two major categories. These include general taxes that include sales tax and VAT and taxes on specific products for example, excise duties on fuel, alcoholic drinks and tobacco. The choice of the balance between the indirect taxes and the direct taxes determines the amount of revenue to raise from the consumption taxes. Value added tax This is a tax that is imposed on the value added on a product or a service in the market. A VAT can be regressive on income of an individual as well as proportional on consumption. Due to the wide production of taxable goods and services, VAT is a major avenue the government uses to collect high amount of revenue as compared to the income tax. The tax base of the VAT is the amount used for consumption. Wealth-based taxes Wealth-based taxes involve the levies charged on the household holdings. An example of a wealth-based tax is the property tax. This is an annual tax on real estates. Through property tax, government is able to obtain adequate revenue to cater for infrastructure systems and other public goods. Through the reduction of the sales and property tax rates on new employees and young investors, the government would reduce their tax burden (Girouard et al, 2006). As a result, the level of investment would increase since the investors are left with more funds for investment purposes. Through effective collection of wealth-based taxes, government authorities are able to streamline investment and services for example, education and transportation systems resulting to improved economy, reduced government borrowing, increased revenue and creation of employment. In order to ensure that the middle and low class earners educate their children, it is imperative to reduce the rate of wealth-based taxes. In this way, more financial resources would be left at the disposal of the middle class and poor earners. As a result of an increment in the rate of school attendance, the more skilled man power will be available in the market leading to a higher production of goods and services resulting to an improved economy. Determination of the income tax in New Zealand Employee fringe benefits In New Zealand, the liability of paying fringe benefits lays on the employer. There are various options under which an employer may choose in order to pay the fringe benefit tax. These include single rate option, alternate rate option, small business option and the close company option. Under the single rate option, an employer pays the tax during each quarter of the year at the rate of 49.25% of the taxable value. Under the alternate rate option, the employer may opt to pay 43% of the taxable value for the first three quarters of the year or 49.25% of the taxable value of fringe benefits for the any of the three quarters of the year. It is important to note that once the return is filled, the alternate rate option cannot be changed. Capital gains The approach of taxing capital gains in New Zealand is not consistent. This is based on the fact that different rules and rates are applied during the taxing of various capital gains. For instance, certain dealings in shares, land transactions, patents and other types of intellectual property are taxed. Other types of capital gains from land, intellectual property are not taxed. There are various options of taxing capital gains. The first one is the accrual based capital gain tax. In this option only real economic gain undergoes taxation. In addition, this option stipulates that a tax is imposed on the assets regardless of whether it is disposed or not. One of the advantages of this option is that there is high likelihood of generating more revenue. The second option of taxing capital gain is the realization-based technique. Under this option, the gain is taxed after the asset is disposed. The major advantage of this option is that the tax liability is easily funded by the tax payer. Gifts According to the New Zealand tax system a gift of any kind is liable for a gift duty. In addition, if the giver of a gift is a permanent resident of New Zealand and he or she gives a property which is not within New Zealand as a gift to another individual such a gift is taxable. One of the aspects of the gift duty is that they are progressive in nature. All individual giving gifts of up to NZD 12,000 should provide a gift statement to the tax authority. According to the tax system in New Zealand, gifts of up to NZD 27,000 are not liable for gift duty (Harcourt, 2005). The table below indicates the amount of gift and the tax rate imposed on such gifts. Amount of gift (NZD) Tax rate (%) 0-27,000 exempted 27,000-36,000 5 36,001-54,000 10 54,001-72,000 20 Above 72,000 25 Effective from 1st October 2011, gift duty in New Zealand will be abolished. This implies that form IR 196 that was filled by the givers of the gift will not be sent to the Inland Revenue Authority (Reinhart et al, 2008). One of the major reasons of the abolition of the gift duty is the high cost of collection. According to the revenue department, gift duties contributed about $1.6 annually. However, half of the revenue generated was used to oversee the system. Prizes and awards, The value of the prizes and awards given to a tax payer should be indicated in the tax return for the purpose of proper computation of the tax. Some of the prizes and awards are not inclusive during the computation of the taxable income. These includes religious gifts, artistic gifts, charitable gifts, the award or the prize was given without performing the actual activity, if the prize or the award is assigned to charitable that is exempt from tax by IRD and awards or prizes given to the government units. Illegal income Illegal income includes undisclosed payments for goods and services sold and profits obtained from illegal activities. The determination of the illegality of an income earned lays on the New Zealand courts. This is based on the fact that income is generated irrespective of activity that generated the income. In New Zealand, the courts distinguishes between the income earned from a trade regardless of whether it is legal or illegal that is obtained by a tax payer and those that the tax payer has only uncertain claim (Gordon, 2003). The court of appeal within New Zealand jurisdiction is also entitled to determine whether the income obtained was as a result of tax evasion or it was not an illegal income to the tax payer. Impute income from owner occupied housing According to the tax system in New Zealand, for the purpose of computation of income tax owner occupies are not supposed to deduct housing costs or mortgage interest (Gordon and Slemrod, 1987). The owners receive tax free which is also referred to as imputed rent. If the mortgage is free then the House value of the owner occupier’s is usually high as compared to a geared landlord house value (Coleman and Landon, 2006). Different tax units that can be utilized in a tax system Non-taxable government units Non-taxable tax units including schools, government units, nursing homes, hospitals, voluntary health organizations are in most cases exempted from paying tax. Some of the major government units exempted from tax include rental and leases to the government, contractors performing the duties of the government and political organizations. Schools In most countries public and private schools are considered as instrumentalities of the government. In this regard, governments are focused at making them posses adequate funds for expansion (Coleman and Landon, 2006). This makes them to be exempted from paying tax by the tax system. In addition, most of the purchases and sales made by the schools are exempted from tax as long as they are paid by the school district board. Some of the items exempted from tax include text books, materials purchased for the construction of classrooms, school supplies, gymnasiums, ground maintenance supplies among others. Nursing Homes and Voluntary Health Associations The exemption of health care organizations from paying tax by most of the tax system is a government strategy of ensuring that majority of the people are exposed to good health care which is vital for the development of any given nation. In the same way, by having more funds for the purchase of the pharmaceuticals, the provision of better health care is achieved and adequate drugs are available in the health care organizations. In addition to the above organizations, some tax systems for instance in the North Dakota covers taxable activities that are exempt from sales tax. These include the activities performed by qualifying organizations. Other sales which are exempted include the receipts from charitable organizations, tickets of admission to districts and counties. Taxation of diplomatic personnel Taxation of diplomatic personnel is arrived at through formation of treaties between the states. In most tax systems, the income and benefits of diplomatic personnel are exempt from taxation. This is adopted in order to avoid double taxation. In the same way, some organizations working in foreign countries are also exempted from tax under the various tax systems. These organizations include pension trusts and charities. Corporations Corporations are other significant tax units which are recognized by majority of the tax systems. Some of the major aspects which are taxed on the corporations include property and income. The tax is imposed using different rates as specified by various tax systems. In order to ensure the tax collection procedures are effective, some tax systems have a specific body entitled with corporate taxation. Taxation of group of companies Tax systems have also adopted various strategies to tax a group of companies. This is mostly applied by the organizations which are under one control. Under this mechanism, tax credits or loss of one company is used by another company. Under the taxation of group of companies a single tax return is filled and forwarded to the tax authority. In order to ensure proper tax returns are prepared, tax system adopt intensive regulations which monitors the financial transaction between the companies, incomes of the companies as well as the deductions recorded in the books of accounts. General taxable persons Taxable persons entail any organization or an individual legally registered to undertake business activities. Such activities include trading, production and supply of services as well as the services rendered by professional such as lawyers, accountants and auditors. A taxable person can be a non-resident or a resident. In order to qualify as a taxable person, one does not need to be making profit. It is vital to note that under various tax systems, a professional who gives services free of charge or charges low fees for the services rendered may be not registered as a taxable person. Tax unit adopted in New Zealand Inland Revenue Department, which is the government body entitled with the duties of collection of taxes in New Zealand emulates general taxable persons as the major tax unit. In order to increase the revenue generated from tax, all employed individuals must obtain an IRD number in order to pay tax and be recognized as a taxable person. Particularly, you need to have an IRD number if you are starting a business entity, earning any amount of income, registering a student in higher institution of learning, filling tax returns, applying for a support of your children among others. Some of the major taxes imposed on the New Zealand residents include tax deducted at source for instance the PAYE which is deducted by the employers from the employees salaries and the residents withholding tax which is deducted form the dividends and interest earned by the investors (Evans et al, 1996). Other taxable incomes include the rental income, self employed income and overseas pension. Inland Revenue Department recognizes companies as taxable persons. In order to increase the investment in New Zealand and enhance economic development the tax authority decreased the corporate tax from 30% to 28% starting from 1st April 2011. Goods and Services Tax (GST) Goods and services are also major tax units emulated by IRD. Having being established in 1986 as an indirect tax, GST which is charged at the rate of 19% on all goods and services has been one of the major sources of revenue for the government. Once the annual turnover of a business reaches $60,000, it should register for GST. Evaluation of whether the tax bases and tax units adopted in New Zealand satisfy the criteria of a good tax system. Income In order to determine the tax payable by a tax payer, a certain percentage rate of tax is imposed on the income of the tax payer. Depending on the amount of income earned by an individual, the tax can be high or low. Since the New Zealand residents earn different level of incomes, IRD emulates tax brackets with a progressive approach. This means that the ability to pay characteristic is depicted thus making the New Zealand tax system to qualify as a good tax system. Consumption Taxes can also me measured by the level of consumption especially of the taxable products. Value added tax (VAT) is the major consumption tax that depicts the amount payable by the individuals engaged in adding value on a good or a service. Through the VAT, the New Zealand government is able to collect high amount of revenue from the low and high income earners depending with the level of consumption. Since consumption taxes are fair and easily collected by the IRD, they depict a good characteristic of a good tax system. Overseas pension Regardless of the location of the employees who are residents of New Zealand, IRD has adopted effective mechanism to assess and tax their incomes. In addition, to the taxes paid by the employees and the business owners in New Zealand, the tax authority is able to collect large amount of revenue. This makes the New Zealand tax system to qualify as a good tax system. Considering the goods and services as well as the general taxable persons, which are the two major tax units adopted by New Zealand tax systems tax payers are certain of the amount they pay as PAYE and as GST. The aspect of certainty and simplicity exhibited by the PAYE and the GST makes the tax system in New Zealand to qualify as a good tax system. Conclusion On behalf of the New Zealand government, Inland Revenue authority is the department that is empowered with collection of tax at national level. Some of the major sources of government revenue that is obtained inform of tax are personal income, business income, capital gains and rates. New Zealand tax authority emulates tax bracket in order to determine the tax payable by each of the tax payer depending on the level of income of the tax payer. Based on the above analyses on the New Zealand tax system, it is clear that an effective tax system should emulate the canon of taxation as stipulated by Adam Smith. For instance, due to the increased need for countries to attain economic growth, the tax system should be economical to avoid loss or revenue during tax collection. The role of taxation in economic development cannot be overlooked. One of the major roles of the income tax is distribution of income. This reduces the economic disparity that exists between the low and high income earners. Consumption tax induces investment leading to generations of job opportunities. New Zealand Income Tax Act highlights the treatments of fringe benefits, capital gains, illegal income, prizes and gifts during the computation of taxable income. References Coleman, A and Landon-Lane J (2006).Housing markets and migration in New Zealand. Reserve Bank of New Zealand Discussion Paper, 2007/12. Dalziel, P. (2002). New Zealand's Economic Reforms: An assessment. Review of Political Economy, vol. 14, no. 1, pp. 31–45. De Veirman, E and A Dunstan, (2008). How do Housing Wealth, Financial Wealth and Consumption Interact? Evidence from New Zealand. Reserve Bank of New Zealand Discussion Paper, 2008/05. Evans, L., Grimes, A., Bryce, W., & Teece, D. (1996). Economic Reform in New Zealand 1984–95: The Pursuit of Efficiency. 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Reinhart, C., & Rogoff, S. (2008). This Time is Different. Princeton and Oxford: Princeton University Press Read More