Inside Money: Paper, scissors, tax - how compliance cuts could play out for investors

David Chaplin predicts that a more digitised tax system will result in more work for users. Image: Thinkstock.

As a member of the invoice-sending classes, the government's proposed tax simplification program makes some sense to me on paper, even on green paper.

Of course, the promise of 'Making tax simpler' is that I won't have to do paperwork ever again.

But the inevitable shift of tax compliance to the seamless world of IT could also mean more digital work for everybody as we are forced to take on tax-collection duties and back-office admin responsibilities previously managed by the IRD.

The government has thought of that potential problem already, though.

"As part of the trade-offs considered in any changes, it is crucial not to fall into the trap of merely shifting costs away from government onto taxpayers," the tax Green Paper says.

"Reforms will not be successful if they cut administration costs but these are more than offset by additional compliance costs on the private sector."

However, the private sector will have to take up at least some of the tax reporting slack in a number of areas.

For example, the proposal to align the resident withholding tax (RWT) on capital income with real-time individual tax rates would require financial institutions to devote substantial resources to information-gathering and sharing.

"Although there may be some short-term costs for financial institutions and other businesses in order to provide this information, there are longer term benefits to those businesses and their customers - for example, more accurate and automatic withholding and increasing levels of compliance," the tax paper says.

"There will also be long-term benefits to financial institutions as tax is integrated into business processes."

The RWT proposals are probably aimed at picking up any under-taxed income on bank deposits and the like: the paper does suggest a revised system "could be used as an efficient method of collecting underpayments of tax".

But the move to match investment income with individual tax rates could have wider implications for fund managers and KiwiSaver providers too.

Although, the paper makes only oblique references to KiwiSaver and the portfolio investment entity regime, there is scope for tax reporting improvements here. In particular, the prescribed investor rate (PIR) - the self-assessed tax rate investors must supply to fund managers and KiwiSaver schemes - is vulnerable to inaccuracies.

Investors are meant to adjust their PIR as income rises or falls through annual threshold levels.

But more likely than not, this is one of the compliance items that falls through cracks in the paperwork.