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 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 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 tax payments or 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, 2022 income tax returns may not be filed until March 2023 (or after) and 2023 income tax returns may not be filed until March 2024 (or after).
While the majority of taxpayers make provisional tax payments using a 5% uplift under legislation, 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. The firms' net operating surplus is a component of Income GDP and is designed to measure net profits of businesses. This measure is approximately equal to accounting profit before taxes, dividends and interest, but after depreciation.
The following assumptions have been used in these financial statements.
- An annual average growth in firms' net operating surplus for the tax year to 31 March 2022 of 13.37%.
This assumption is derived from Tatauranga Aotearoa Statistics New Zealand's (Stats NZ) quarterly data series released on 14 July 2022. This series was developed for institutional sector accounts, balance sheet 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 2022 quarter - stats.govt.nz
Net operating surplus is delivered from gross operating surplus and gross mixed income less consumption of fixed capital.
This series shows a growth rate 5.34% higher than Treasury's most recent forecast of net operating surplus growth, which was 8.03% for the tax year to 31 March 2022. This was included in the Treasury's economic forecast as part of Budget 2022 in May.
The higher growth rate in Stats NZ's updated data release is consistent with other economic data releases since the Treasury's forecast of net operating surplus was finalised on 25 March 2022.
- An annual average growth in the firms' net operating surplus for the tax year to 31 March 2023 of 8.01%.
For the March-year 2023, the Treasury's latest forecast of firms' net operating surplus growth of 13.35% was published in Budget 2022. However, using the recently published Stats NZ annual average growth in firms' net operating surplus for the tax year to 31 March 2022 as a starting point, the Treasury's Budget 2022 forecast level of firms' net operating surplus for the year to March 2023 now implies a growth rate of 8.01%.
There is no new forecast information publicly available in respect of firms' net operating surplus for the March 2023 tax year. Therefore, we are unable to rebut the presumption to use the Treasury's forecast of firms' net operating surplus growth of 13.35%, apart from reducing that to 8.01% owing to the upwardly revised 2022 tax year starting point.
The firms' net operating surplus uplift assumption of 8.01% for companies and other persons tax revenue for the 2023 tax year is lower than that of 13.37% for the tax year ended 31 March 2022. This is in line with current economic data, particularly around the weakening real GDP growth and terms of trade, the potential for the tight labour market to erode business profits, and the rising interest rates as Te Pūtea Matua the Reserve Bank considers how best to control inflation. It is also notable that wage subsidy support (2022: $4.860 billion) and COVID-19 Support Payments (2022: $4.257 billion) are not currently forecast to be repeated in 2023. There may be further downside risks. However, 6 months into the 2023 tax year, we are still unable to quantify with any certainty the impact on the firms' net operating surplus for the whole 2023 tax year posed by the recent data releases and economic commentary.
Therefore, at this point in time, we believe the current estimate of the March-year 2023 firms' net operating surplus of 8.01% growth is still relevant as an uplift assumption, albeit it is uncertain. For the financial statements for the year ending 30 June 2022, we take one quarter of the full 2023 income tax estimate as accrued revenue, so in that respect, the uncertainty is limited to a portion of the year.
As a result, the factors applied to the prior year's terminal tax is 113.37% for the 2022 income tax year, which ended on 31 March 2022, and 108.01% for the 2023 income tax year, which ends on 31 March 2023, with the period from 1 April 2022 to 31 March 2023 included in these financial schedules. 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:
- for customers with March balance dates for the 2022 income tax year, revenue is estimated as 113.37% of the prior year terminal tax.
- for customers with March balance dates for the 2023 income tax year, revenue is estimated as 108.01% of the prior year terminal tax.
- 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 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 who are 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 who are subject to provisional tax and 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.
| 2021 | Operating surplus | 2022 |
|---|---|---|
| 2.68% | Stats NZ average annual growth in net operating surplus - 2021 income tax year | n/a |
| 1.24% | Treasury's forecast firms' net operating surplus - 2022 income tax year | n/a |
| n/a | Stats NZ average annual growth in net operating surplus - 2022 income tax year | 13.37% |
| n/a | Treasury's forecast firms' net operating surplus - 2023 income tax year | 8.01% |
| Sensitivities | ||
| $196,000 | Impact on revenue of a 1% increase in firms' net operating surplus ($000) | $244,000 |
| $981,000 | Impact on revenue of a 5% increase in firms' net operating surplus ($000) | $1,218,000 |
| $1,963,000 | Impact on revenue of a 10% increase in firms' net operating surplus ($000) | $2,436,000 |
| $(196,000) | Impact on revenue of a 1% decrease in firms' net operating surplus ($000) | $(244,000) |
| $(981,000) | Impact on revenue of a 5% decrease in firms' net operating surplus ($000) | $(1,218,000) |
| $(1,963,000) | Impact on revenue of a 10% decrease in firms' net operating surplus ($000) | $(2,436,000) |
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. The estimation of 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 quarterly data series, Stats NZ revises previously published data when more information comes to light.
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.
- For customers who have not filed a return, the estimate is based on the most recently assessed GST return.
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 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.
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.
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 adjustment calculated by the consulting actuaries.
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 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.