Will digital tax pave the way for automation?

This article was current at the time of publication.

In February this year, the New Zealand Inland Revenue Department (IRD) circulated an issues paper titled Tax administration in a digital world.

It noted that while the tax system works well for most – for example, PAYE earners – it’s less suited to those with a variety of income sources or for small businesses.

It maintains that the business transformation digitisation program enables digital transactions with taxpayers and their representatives, thereby creating a platform for further development of a digital tax system.

In particular, “tax calculations can be embedded in the software businesses use” and tax can become an automated process that happens as a by-product of other processes – a “paradigm shift” for taxpayers and tax administration.

CPA Australia’s submission to the issues paper drew on the experience of digitisation in the Australian Taxation Office and notes that advisers will continue to play an important role.

“Our Australian members, in particular, small businesses and tax agents are finding the pace, breadth, and cost of digital transformation to be challenging,” the submission states. 

CPA Australia’s Asia-Pacific small business survey 2021-22 reveals small businesses in Australia and New Zealand lag the regional average in digital capability, meaning a “staged and flexible” approach is needed.

CPA Australia’s Senior Manager Tax Policy, Elinor Kasapidis, says the strains of the past two years mean many businesses and agents are struggling to keep up with changes required by government.

“Small businesses operate under many constraints and digital transformation is often low on the priority list,” Kasapidis says.

“Our members play an important role in encouraging and supporting digital uptake.”

When tax involves external parties

IRD officials believe further changes to tax administration will be most pronounced for the small business sector.

They say the trend towards tax occurring in natural systems (i.e., management reporting software) will be driven by innovation in the private sector and mean greater involvement of external parties in the tax system.

External parties include:

• The traditional tax agent or intermediary
• Providers of products and services taxpayers use for a business purpose that, as a by-product, help with their tax
• Providers of services unrelated to tax, but which use tax information and need some form of access to IRD data

Kasapidis says it’s difficult to predict the types of new external parties that might emerge.

While CPA Australia supports the access digitisation enables to IRD systems by intermediaries and representatives, it should not come at a cost to regulatory standards and consumer protections, she adds.

Kasapidis notes that CPA Australia has long advocated for improvements to the New Zealand tax agent framework. She recommends a standalone review of the regulatory framework for external parties “to determine whether it remains fit for purpose, supports voluntary compliance and protects consumers”.

This should distinguish between tax agents, tax advisers, and other intermediaries, with requirements differentiated according to roles.

The IRD paper also raises the possibility digitisation will allow greater sharing of IRD data with non-government third parties, with taxpayer consent – for example, to expedite a loan application.

CPA Australia’s view is that the IRD should undertake a process to identify where tax information could be used by taxpayers to their benefit and to identify the pool of third-party recipients.

Year-end adjustment angst

The IRD paper notes that “much of the complexity of determining income tax arises from end-of-year adjustments,” with many smaller firms finding these are made solely to comply with tax rules.

“The cost of any accuracy gain outweighs the tax benefit, especially as many adjustments unwind in the subsequent year,” it states.

Digitisation presents the opportunity for more taxpayers, assisted by “external parties”, to move to self-assessment rather than by the Commissioner of Taxation.

However, it also raises questions about whether taxpayers should be protected concerning a tax shortfall if they have followed the advice and calculations of the external party, and what implications there should be for the external party if the calculation is wrong.

CPA Australia believes the liability of taxpayers who have correctly provided information needs to be limited to tax shortfalls.

Kasapidis says as New Zealanders increasingly use software and apps to help prepare their taxes and keep records, they must understand what happens when there’s a calculation error.
“Digital service providers also must ensure their products and services deliver as stated, and the onus should be on them to self-report and correct errors,” she maintains.

The system needs reviewing

CPA Australia believes the tax regulatory environment requires more detailed review – especially given the expansion of external parties that may interact with the IRD or tax system in the future.

“The challenge is trying to simplify and automate a system that – in many parts – is inherently complex and requires human judgement,” Kasapidis says.

“We support technology that allows advisers to focus on value-adding activities rather than compliance. But a lot of tax is nuanced and can’t be decided by an algorithm, so advisers will continue to play an important role.

“The digital capability of New Zealand businesses lags their Asia-Pacific counterparts. Realistically, this means the digital dream is quite a way off and the tax system needs to remain accessible to all taxpayers.”