"This would mean that any over-deductions could not be refunded at year end, nor would any under-deductions give rise to a end-of-year liability."
However, no firm decision has been made whether to proceed.
There would be exceptions to the final tax rule where an individual had income from salary and wages for 10 months or less during the tax year (for example, people retiring on turning 65 part-way through a year), where withholding tax was deducted from independent contractors or those receiving social policy entitlements, such as working for families.
If the person had income from other sources, they would still be required to file a tax return with that other income included.
The tax payable on that income would be based on the marginal tax rates applicable to that additional income only, he said.
The income which had PAYE deducted would not be included in the end-of-year tax return.
In order to reduce further the need for end-of-year tax returns, it was expected the Government would introduce greater disincentives for persons having resident withholding tax (RWT) deducted from interest at a rate too low - someone with $55,000 of income using the 17.5% RWT rate rather than the 30% RWT rate.
"The reason that Government is promoting this change is that there are still a large number of people filing personal tax summaries where the refund or payable amount is less than $1 per week.
The Government puts resources into processing these returns which it thinks can be better used elsewhere."
The Government aimed to radically reform the need for individuals to file income tax returns back in 2000, with the aim that 800,000 fewer returns would be required to be filed, Mr Truman said.
Since that time, and partly due to technological advances, there had been a significant rise in intermediaries located in shopping malls offering a quick check of taxpayers' Inland Revenue records to determine if a refund was available.
That had led to a significant increase in the number of personal tax summaries being finalised each year, he said.
"To some extent, this has negated the cost savings that Inland Revenue was seeking with the 2000 change.
"The current proposals would make a serious dent in the business of these intermediaries."
The success of the proposal was ensuring that the PAYE system was further improved to reduce the instances where PAYE was over- or under-deducted.
Technological changes would make it possible for a computer software processing system to interact with Inland Revenue's data and calculate the tax payable each pay period based on year-to-date data, enabling any previous errors to self correct, Mr Truman said.
"Ultimately, if the PAYE system is more accurate, then there is no need to end-of-year personal tax summaries - and tax returns in some cases."
Providing exemptions for individuals who have earned salary and wages for 10 months or less in an income year would still enable people who were significantly overtaxed under the PAYE rule to obtain a refund, he said.
People in that category included people retiring, students working during the holidays, people permanently arriving in or leaving New Zealand and people who lost their jobs.
One of the possible complications would be people with investment income facing a change to which tax rate was applied to their income, Mr Truman said.
Finance Minister Bill English had "floated" the idea of moving to a dual income tax system where labour and income from savings and investment might be taxed at separate rates.
In broad terms, the Government might seek to encourage saving by taxing income from savings at a lower rate than the rate for income from salary and wages and from active businesses.
If a dual rate of tax did eventuate, the level of annual income from salary, wages and business income was unlikely to have the same degree of impact on the final tax payable on investment income as was now the case.
Now, all income was taxable under the progressive marginal tax rate system, he said.
If investment income was taxed at a flat rate, rather than the current progressive tax rate, it was far easier to deduct the tax on all income types at source.
"Looking forward, year-end tax returns may be a thing of the past for many individuals."
Provided the tax was collected at the correct rate at source, taxpayers would welcome doing away with the need to complete tax returns and the Government would end up with more efficient tax system that cost less to administer.
The economy as a whole was better when compliance costs were minimised, Mr Truman said.
