Tax revenue is a non-exchange transaction.
This means the payment of tax in itself does not entitle a customer to an equivalent value of services or benefits, because there is no direct relationship between paying tax and receiving the Crown services and benefits.
Tax revenue is recognised when a taxable event has occurred, the tax revenue can be reliably measured and it is probable that economic benefits will flow to the Crown.
Tax is recognised at face value as the fair value is not materially different from the face value.
The New Zealand tax system is based on self-assessment where customers are expected to understand the tax laws and comply with them. Inland Revenue helps customers comply and addresses non-compliant activities. Most people pay their fair share of tax. For the minority who do not, Inland Revenue intervenes and encourages them to do the right thing. However, such procedures cannot be expected to identify all sources of unreported income or other cases of non-compliance with tax laws. Inland Revenue is unable to reliably estimate the amount of unreported tax.
Income tax
Income tax is recognised on an accrual basis in the period the taxable event occurs. It is deemed to accrue evenly over the period to which it relates.
Where income tax returns have not been filed for the relevant period, accrued income tax revenue receivable or payable has been estimated based on current provisional assessments or prior year provisional or terminal assessments. Tax revenue is recognised proportionally based on the balance date of the taxpayer. The amount of income tax receivable or refundable is not known with certainty until income tax returns for the period have been filed. The filing of terminal tax returns can happen more than a year after the tax year. For example, 2021 income tax returns may not be filed until March 2022 (or after) and 2022 income tax returns may not be filed until March 2023 (or after).
The income tax revenue estimation process is based on a rebuttable presumption that the forecast of firms' net operating surplus, from the most recent Treasury forecast, is used as the uplift assumption, unless rebutted for material impacts. Refer to note 2 for more information.
The following uplift assumptions have been used in these financial statements:
- An annual average growth in firms’ net operating surplus for the tax year to 31 March 2021 of 2.68%.
This assumption is derived from Statistics New Zealand's (Stats NZ) new quarterly data series released on 22 July 2021. This series was developed for institutional sector accounts, balance sheets, and the nominal income measure of quarterly gross domestic product (GDP), to provide more timely data on New Zealand's economy. Details of the quarterly release can be found on the Stats NZ website.
National accounts (income, saving, assets, and liabilities): March 2021 quarter - stats.govt.nz
This differs from the Treasury's most recent forecast of net operating surplus, which was 0.40% for the tax year to 31 March 2021. This was included in the Treasury's economic forecast as part of Budget 2021 in May. The higher growth rate in Stats NZ's updated data release is consistent with other economic data releases since the Treasury forecast of net operating surplus were finalised on 1 April 2021.
- An annual average growth in the Treasury’s forecast of net operating surplus for the tax year to 31 March 2022 of 1.24%.
As a result, the factor applied to prior year's terminal tax is 102.68% for the 2021 income tax year, which ended on 31 March 2021, and 101.24% for the 2022 income tax year, which ends on 31 March 2022, with the period from 1 April 2021 to 30 June 2022 included in these financial schedules, rather than the previous standard factor of 105%. The non-March balance dates use a pro-rata of these rates.
The measurement of income tax accruals requires significant estimates, judgements and assumptions and has a number of uncertainties. These include the following:
- Where taxpayers have chosen to estimate their provisional tax, income tax revenue is recognised based on the most recent estimate provided to Inland Revenue.
- Where customers subject to the provisional tax regime have not yet filed a terminal tax assessment:
- for October to March balance dates for the 2022 income tax year, provisional tax assessments are recognised as revenue based on the prior year terminal tax adjusted for the annual average growth in the Treasury’s most recent forecast of firms’ net operating surplus for that year as at 1 April 2021.
- for April to September balance dates for the 2022 income tax year, provisional tax assessments are recognised as revenue based on the prior year terminal tax adjusted on a pro-rata basis for the Stats NZ annual average growth in net operating surplus for that year as at 22 July 2021 and the Treasury’s firms’ net operating surplus for that year as at 1 April 2021.
- for October to March balance dates for the 2021 income tax year, provisional tax assessments are recognised as revenue based on the prior year terminal tax adjusted for the annual average growth in firms’ net operating surplus from Stats NZ for that year as at 22 July 2021.
- for April to September balance dates for the 2021 income tax year, provisional tax assessments are recognised as revenue based on the prior year terminal tax adjusted on a pro-rata basis for the Stats NZ annual average growth in net operating surplus for that year as at 22 July 2021 and the Treasury’s firms’ net operating surplus for that year as at 1 April 2021.
- for all other income tax years, provisional tax assessments are recognised as revenue based on the provisional tax method adopted by the taxpayer. Provisional assessments are based on 105% of the prior year terminal tax.
- Where the taxpayers have made payments for more than the provisional tax assessment submitted, their credit balance is also accrued as revenue.
- Where taxpayers have made payments to Inland Revenue but have not submitted a provisional tax assessment for the period, an estimate is made based on the payments.
- For taxpayers not subject to provisional tax, an estimate is made of the tax revenues receivable and refundable at year end based on prior year terminal assessments.
- For taxpayers subject to provisional tax who have not filed their tax return for the previous period, an estimate is made of the tax revenues receivable and refundable at year end based on prior year provisional tax assessments.
The significant assumptions and sensitivities behind the estimation of income tax revenue for companies and other persons are:
| 2020 | 2021 | |
|---|---|---|
| Assumptions | ||
| 2.79% | Treasury’s forecast firms’ net operating surplus - 2020 income tax year |
N/A |
| (2.74%) | Treasury’s forecast firms’ net operating surplus - 2021 income tax year | N/A |
| N/A | Treasury’s forecast firms’ net operating surplus - 2022 income tax year | 1.24% |
| N/A | Stats NZ average annual growth in net operating surplus - 2021 income tax year | 2.68% |
| Sensitivities | ||
| $185,000 | Impact on revenue of a 1% increase in firms’ net operating surplus ($000) | $196,000 |
| $924,000 | Impact on revenue of a 5% increase in firms’ net operating surplus ($000) | $981,000 |
| $1,848,000 | Impact on revenue of a 10% increase in firms’ net operating surplus ($000) | $1,963,000 |
| $(185,000) | Impact on revenue of a 1% decrease in firms’ net operating surplus ($000) | $(196,000) |
| $(924,000) | Impact on revenue of a 5% decrease in firms’ net operating surplus ($000) | $(981,000) |
| $(1,848,000) | Impact on revenue of a 10% decrease in firms’ net operating surplus ($000) | $(1,963,000) |
The net operating surplus figure is based on the relevant methodology adopted for the financial year.
Income tax revenue has a high degree of estimation and is therefore uncertain. Application of key assumptions used in estimating income tax revenue may not necessarily reflect actual tax returns when they are filed. Estimating income tax revenue is challenging because estimation is required so far ahead of the point when a taxpayer is required to file relevant income tax returns. In addition, forecasts of firms' net operating surplus are inherently uncertain and volatile, particularly with the ongoing impact of the COVID-19 pandemic on the economy. While we have confidence in the reliability of Stats NZ's quality assurance processes in releasing the new quarterly data series, Stats NZ revises previously published data when more information comes to light.
Goods and services tax (GST)
GST returns are assessed on a 1, 2, 3 or 6-monthly basis and are due the month after the end of the period. At year end, Inland Revenue estimates the amount of GST outstanding as follows, for customers who:
- file a return of GST for the June period, the actual amounts filed are used
- have not filed a return, the estimate is based on the most recently assessed GST return.
Source deductions (PAYE)
Employers are required to file an employment information form for each payday. Revenue is assessed based on these forms. June employment information forms filed by employers in July are accrued at year end.
Child support
Child support revenue is the penalties levied on child support debts owed to both custodial persons and the Crown by parents who pay child support, as well as child support due to the Crown. This revenue is recognised initially at fair value and subsequently tested for impairment at year end.
Interest unwind - Small Business Cashflow (loan) Scheme
Small Business Cashflow Scheme loans are initially discounted to fair value. This predominantly reflects the time value of money. As time moves on, loans become closer to being repaid and are therefore worth more. This increase in value is recognised as interest unwind.
The interest unwind has been calculated using a discount rate appropriate for low-rated commercial and unsecured retail lending.
Interest unwind - student loans
Student loans are initially discounted to fair value. This predominantly reflects the time value of money. As time moves on, student loans become closer to being repaid and are therefore worth more. This increase in value is recognised as interest unwind.
The interest unwind has been calculated using the official cash rate plus a risk premium calculated by the consulting actuaries.
Fair value remeasurement - Small Business Cashflow (loan) Scheme
Fair value remeasurement is the change in the value in the loan portfolio over the year. Small Business Cashflow Scheme loans are initially measured at fair value. The changes to fair value between periods are recognised as a gain or loss in the net surplus or deficit. More information is provided in note 6.
Fair value remeasurement - student loans
Fair value remeasurement is the change in the value in the student loan portfolio over the year. Student loans are initially measured at fair value.
The changes to fair value between periods are recognised as a gain or loss in the net surplus or deficit. More information is provided in note 7.