550,000 people underpaid tax on investments while 950,000 paid too much, says IRD

Wednesday, 19 June 2019

Some taxpayers have been left with a sour taste as a 'line in the sand' sees underpayers get to keep historical underpayments on investments, while overpayers are shut out from refunds.

Inland Revenue says it has now discovered 550,000 people underpaid tax on investments such as KiwiSaver last year, by an average amount of between $82 and $91.

They are being billed for the shortfall, which resulted from selecting a PIR (prescribed investor tax rate) on their investments that was too low, but they won't be pursued for any historical underpayments in previous years.

Inland Revenue estimated another 950,000 people overpaid tax on KiwiSaver and other investments last year by an average amount of $44 by instead selecting a PIR that was too high, but they will not be eligible for any refunds.

The department had said earlier this month that 450,000 people had been paying the wrong rate of tax on KiwiSaver and other PIE investments by selecting an incorrect PIR rate.

**READ MORE:

Inland Revenue commissioner Naomi Ferguson has said the department has drawn a 'line in the sand' for people who selected too low a PIR tax rate on their investments prior to the 2018-19 tax year.

* Revenue Minister Stuart Nash asks IRD to investigate allowing investment tax refunds

* KiwiSaver tax dodgers may have got away with $200m-plus reward

* Huge numbers who underpaid tax on KiwiSaver last year 'off the hook' for previous years**

Inland Revenue said it was now taking steps to help make sure investors were on the right rate.

Inland Revenue said in response to an Official information Act request that it believed it was owed a total of $45m to $50m for the tax that was underpaid in the 2018-19 tax year and estimated it had received $42m that year from people who paid too much.

Revenue Minister Stuart Nash has asked Inland Revenue to look into the implications of a law change that would allow people to claim back tax they had overpaid on KiwiSaver in future.

'The average amount owing is between $82 and $91,' transformation director Ron Grindle said.

Ordinarily, the returns that people earned from KiwiSaver investments would be taxed at a maximum rate of 28 per cent, with that tax coming out of their investment balances.

Changes designed to simplify the tax system resulted in an extra workload for the department last year. (First published January 2020)

But people who declared too low a PIR last year need to pay 33 per cent tax on that income to Inland Revenue as part of their annual tax settlement.

Inland Revenue commissioner Naomi Ferguson told a select committee last week that it had decided to 'draw a line in the sand' by not looking into whether those people might have avoided tax by also selecting too low a PIR in previous years.

Under the current law, the 950,000 taxpayers who paid too much tax will not be able to get a refund, but Revenue Minister Stuart Nash has asked Inland Revenue to look into the implications of a rule change, allowing for refunds in future.

The Government should change the law to allow people who overpaid tax on KiwiSaver to claim back their overpayments last year, as well as in future, National Party revenue spokesman Andrew Bayly says.

National Party revenue spokesman Andrew Bayly said Nash should have added a clause to a tax bill that is currently going through Parliament to allow for PIE tax refunds and made that apply to the 2018-19 tax year, so overpayers could have claimed refunds for that year also.

'If you are going to make people pay from 2018-19, refunds should apply from the same date.

'There is no excuse not to do it. If you are going to take from one and not give back to the other that is totally unfair,' he said.

Nash has been approached for comment.

Bayly previously said industry sources believed the tax department was choosing not to recoup about $200m in avoided tax as a result of its decision not to chase after historical underpayments.

That estimate appears to be broadly supported by the calculations provided by Inland Revenue on Wednesday.

But Grindle said Inland Revenue could not determine how many people had used an incorrect PIR in previous years with the information it currently held.

'To go back over past years and determine incorrect payments based on wrong PIRs would require significant work not just for Inland Revenue but for individual taxpayers and financial institutions,' he said.

'Therefore, we cannot reliably estimate the overpaid or underpaid tax for those years as a result.'

Inland Revenue deputy commissioner Sharon Thompson said that from next month Inland Revenue would begin 'proactively contacting customers' who were on an incorrect PIR to let them know they needed to change it.

'They can then contact their investment provider to change their rate.

'And in the future, we'll contact customers during the year if we identify they are using an incorrect PIR. This will be an on-going process to ensure that customers can get things right from the start,' she said.

Inland Revenue carried out a major upgrade of its income tax system in April, as a part of its $1.6 billion Business Transformation project.

'Because our new system groups together all the income people have, including wage and salary and investments, we can now see if people are on the right investment tax rate relative to their income level.

'In the past our old system did not do this automatically and we relied on people and their investment providers to make sure they were on the right rate,' she said.

Martin Hawes, chairman of the Summer KiwiSaver Investment Committee, believed Inland Revenue should spend the $44m 'windfall' it had received in overpaid tax on a campaign to make sure all people with PIE investments were on the right tax rate.

'What we are seeing is huge public ignorance. I don't think there has ever been a really thorough explanation of how this works.'