Limited Effectiveness

22.96. The key to the effectiveness of the tax instalment deduction system is the definition of ‘salary or wages’ in the legislation. While the definition is drafted to include payments made ‘under a contract which is wholly or substantially for the labour of the person to whom the payments are made’, its interpretation has severely limited the application of tax instalment deductions. Generally the system cannot apply unless payments are made in circumstances where a relationship of employer and employee clearly exists, and difficulties arise where payments based on work performed are made to one of a group of workers operating in a loose partnership arrangement: payments of the latter type cannot be said to be substantially for the labour of the one person to whom the payment is made.

22.97. Where the relationship of employee and employer is absent, the Committee recommends that payments substantially for the labour of one person or a small group of persons be included in the system of tax deductions at source. Like salary and wages, the income would be brought to account as income in a return after the end of the income year and, on assessment, credit would be given for the tax deductions. In similar fashion the system of tax deductions at source could be extended to certain payments for goods where the payment is substantially for the labour of the seller: for example, payments to individuals for supplying animal skins or opals. The systems of tax instalment deductions employed in the United Kingdom and New Zealand contain provisions similar to what is being proposed here.

22.98. The tax deductions would have to be made at a flat rate. However, a taxpayer would need to be given an opportunity of applying to the Taxation Office for a reduced flat rate where the nature of his operations and expected net income warranted a lower rate. Similarly, where the extent and nature of a taxpayer's operations,

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the maintenance of adequate records and the lodgment of past returns give grounds for reasonable expectation of the lodgment of complete and accurate returns and the payment of tax, exemption from flat-rate deductions at source might be sought from the Commissioner.

22.99. The areas of activity to be covered by extended tax deductions at source might include the building and construction industry; primary production, including forest operations and fishing; the entertaiment industry, including professional sport; and free-lance writing. The experience of the Taxation Office in these and other fields of activity where difficulties have been experienced in collecting tax should be drawn upon in delineating the areas to be covered.

22.100. Secondary or casual employment is another area in which the system of tax instalment deductions fails to operate effectively. At present secondary or casual employment yielding $20 or less per week is not subject to instalment deductions; and a casual employee who lodges with his employer a declaration claiming reductions for dependants is freed from instalments in respect of considerably higher casual earnings. While, to an extent, earnings not subject to tax instalment deductions must be shown in Statements of Earnings supplied to employees, with a copy to the Taxation Office, the coverage is far from complete. There is thus substantial scope for tax avoidance in the case of earnings from secondary or casual employment, and the opportunity of using false names increases the scope yet further.

22.101. Where a relationship of employer and employee arises, the Committee recommends that, for tax instalment deduction purposes, a distinction be drawn between main regular employment on the one hand and all other employment— secondary or casual—on the other. The former should be subject to tax instalment deductions on the present basis, main regular employment being interpreted as employment expected to continue for more than one week and to involve working on at least four days for a minimum of 30 to 35 hours a week. Other employment ought to be subject to tax instalment deductions at a flat rate high enough to discourage working under a false name and giving strong encouragement to include the income, and the credit for tax instalment deductions, on a return of income. It would be necessary to determine an amount per week, less than the present $20, below which no tax deductions would have to be made. There would also need to be provision for an alternative to the basic flat-rate deductions: employee taxpayers taking secondary or casual employment should be able to apply to the Taxation Office for a certificate authorising, in relation to a particular employment, flat-rate instalment deductions at a lower rate or in some cases no deductions. The employee would have the option of accepting the basic flat-rate deduction with the prospect of a refund on assessment of his return of income after the end of the year or of applying to the Taxation Office for a reduced flat-rate deduction: in both instances the income and credit for instalment deductions would still have to be included in the return of income.

22.102. A third area in which the tax instalment deduction system lacks effectiveness is in relation to benefits in kind—‘fringe benefits’—given by an employer to an employee. In Chapter 9 the Committee has made recommendations on the tax treatment of non-cash benefits from employment. Briefly, the Committee recommends that the tax instalment deduction system be extended, where possible, to ensure adequate instalment deductions in respect of the assessable value of employment benefits that are to be brought to account as assessable income. The present legislation on tax instalment deductions covers meals, sustenance or the use of premises or

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quarters, in addition to salary or wages, but the statutory figures of value obviously need to be lifted.

22.103. The Committee recognises that these recommendations will, to some extent, involve employers and certain other users of labour in additional work. But if, as a result, the effectiveness of the tax system is increased, the price is worth paying.