Tax revenue
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 and/or provisional assessments for that period, or the prior year residual income tax or provisional assessments and payment information.
Tax revenue is recognised proportionally based on the balance date of the customer. 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, 2023 income tax returns may not be filed until March 2024 (or after) and 2024 income tax returns may not be filed until March 2025 (or after).
While the majority of customers make provisional tax payments during a year 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 Gross Domestic Product (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 2023 of 2.41%.
- An annual average growth in firms’ net operating surplus for the tax year to 31 March 2024 of 0.98%.
These assumptions are directly from the Treasury’s most recent forecast of firms' net operating surplus growth in the Pre-election Economic and Fiscal Update 2023, which was finalised on 2 August 2023 and published on 12 September 2023.
The March 2023 tax year assumption is materially consistent with the 2.35% annual growth rate implied by Tatauranga Aotearoa, Stats NZ quarterly national accounts data (income, savings assets and liabilities) released in July 2023.
There is no more up-to-date publicly available information in respect of firms’ net operating surplus for the 2023 and 2024 tax years and, therefore, we have not rebutted the presumption to use the Treasury’s forecast of firms’ net operating surplus growth.
For the 2024 income tax year, which ends on 31 March 2024, the period from 1 April 2023 to 30 June 2023 is included in these financial schedules. The non-March balance dates use a pro-rata calculation 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 customers 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 customers with March balance dates for the 2023 income tax year, revenue is estimated as 102.41% of the prior year residual income tax
- for customers with March balance dates for the 2024 income tax year, revenue is estimated as 100.98% of the prior year residual income tax
- for all other income tax years, provisional tax assessments are recognised as revenue based on the provisional tax method adopted by the customer. Provisional assessments are based on 105% of the prior year residual income tax.
- Where customers have made payments for more than the provisional tax assessment submitted, their credit balance is also accrued as revenue.
- Where customers 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 customers who had a receivable or refundable terminal assessment in the prior year but are not subject to provisional tax, the estimation is based on the prior year terminal assessment.
- For customers 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 and any prior year payments which were in excess of their provisional assessment.
Changes in estimations
Updates were made to the estimation basis used in the measurement of income tax during the period. These include:
- Where customers 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. The estimation calculation has been updated to align with the provisional tax due dates rather than the number of payments expected for the year, and
- Where customers have made payments for more than the provisional tax assessment submitted for the prior year, the value of these payments is used as the estimation and an uplift assumption is no longer applied.
The net impact of these changes reduced tax revenue by $480 million, made up of $202 million for companies and $278 million for other persons.
Significant assumptions and sensitivities
| 2022 | Operating surplus and sensitivities | 2023 |
|---|---|---|
| 13.37% | Tatauranga Stats NZ average annual growth in net operating surplus–2022 income tax year | n/a |
| 8.01% | Treasury's forecast firms' net operating surplus–2023 income tax year | 2.41% |
| n/a | Treasury's forecast firms' net operating surplus–2024 income tax year | 0.98% |
| Sensitivities | ||
| $244,000 | Impact on revenue of a 1% increase in firms' net operating surplus ($000) | $245,000 |
| $1,218,000 | Impact on revenue of a 5% increase in firms' net operating surplus ($000) | $1,227,000 |
| $2,436,000 | Impact on revenue of a 10% increase in firms' net operating surplus ($000) | $2,455,000 |
| $(244,000) | Impact on revenue of a 1% decrease in firms' net operating surplus ($000) | $(245,000) |
| $(1,218,000) | Impact on revenue of a 5% decrease in firms' net operating surplus ($000) | $(1,227,000) |
| $(2,436,000) | Impact on revenue of a 10% decrease in firms' net operating surplus ($000) | $(2,455,000) |
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.
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 customer payments for that return period or the most recently assessed GST return.
Non-tax revenue
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.