Why fewer people are set to pay tax on income they haven't received

A change to the rules means fewer people will have to account for tax on money they haven't yet received.

Chartered Accountants Australia and New Zealand is welcoming a change to the "cash basis person" definition, the first in 30 years.

"A 'cash basis person' might be an unfamiliar term, but it's quite simple. It's all of us who pay tax on income when it is received, rather than having to pay tax on income when it is accrued or earned for tax purposes," said CA ANZ tax leader John Cuthbertson FCA.

"No one enjoys paying tax on income they haven't yet received - whether that's interest paid at maturity on a term deposit or unrealised foreign exchange gains on offshore accounts.

"Foreign exchange can be particularly problematic. When exchange rates are volatile, taxpayers can end up paying tax on paper gains that may never be realised, creating uncertainty and undermining even the best provisional tax planning.

"Under previous rules, a cash basis person was someone with less than $100,000 of income from financial arrangements like bank accounts, term deposits and government or corporate bonds, or less than $1 million in total value of these assets.

"The limits have now been lifted to $200,000 for income and $2 million for financial arrangements like bank accounts and savings.

"In addition, the requirement to calculate the difference in income as between the two methods has been eliminated, for which taxpayers and their accountants will be eternally grateful."

He said it was previously the case that the difference in income calculated on a cash and accrual basis could not be more than $40,000.

"A perverse requirement as you were virtually compelled to make the more complex calculation to confirm that it wasn't required - then you were not required to return income on that basis.

"With inflation over time, the previous thresholds had become massively outdated, similar to our marginal tax brackets which were updated last year.

"These rules were imposing a lot of cost and complexity on affected taxpayers, both in terms of the income calculations required and the resulting taxation payable, including on unrealised gains.

"With this change, more people will be able to pay tax when they receive income, rather than going through the rigmarole of complex tax calculations - and I say that as a specialist tax accountant.

"Now that the thresholds have been lifted, most people moving to New Zealand will have one less tax complexity dissuading them," Cuthbertson said.

Deloitte tax expert Robyn Walker said it brought the law back to something more sensible and aligned with what had probably been happening in practice.

"This change isn't new, rather it was included in the tax bill that was released last year and enacted at the end of March. As pointed out by CAANZ, some taxpayers would have been doing complicated calculations and will now have a reprieve from these."

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