The taxation rules applying to Maori authorities have remained largely unchanged since their initial design in 1952. As a result, they do not incorporate subsequent tax reforms such as company imputation, nor do they seem to acknowledge the broader range of economic activities Maori have entered into or the greater resources available to Maori today, compared with the 1950s. Thus the rules may hinder rather than assist Maori economic and social development in the long term.
The Government's strategic objective for Maori development involves developing and implementing policies and processes that lead towards closing the economic and social gaps between Maori and non-Maori. The review will consider whether these laws are impediments to this objective or otherwise distort Maori economic and social development.
Purpose of the review
The review will consider whether the current tax treatment of Maori authorities distorts Maori social and economic development and, if so, how those distortions can be addressed. It will also clarify the "public purpose" test for charitable status to provide certainty for iwi and hapu trusts and other entities seeking charitable income tax exemption.
The review will result in policy recommendations to the Government on the most appropriate tax treatment of Maori authorities, having regard to the Government's objectives for tax policy and Maori development.
The review will be carried out in accordance with the Generic Tax Policy Process (GTPP), which the Government has adopted for the development of tax policy. This process provides opportunities for taxpayers affected by the proposed changes, and other interested parties, to be consulted at key points in the policy-making process.
The review methodology will include:
- an historical overview of the Maori authority tax rules, including policy, administrative practice and compliance issues.
- examining the underlying tax policy objectives of the current rules and their appropriateness for the taxation of Maori authorities within the existing framework for tax policy.
- assessing the appropriateness of alternative tax rules (such as the company and trust rules) that could be applied to Maori authorities and considering any transitional issues.
- examining all available information on Maori authorities (including Inland Revenue tax legislation files and operational guidelines) to determine what additional information is required.
- taking account of the work being undertaken by other government departments that may affect this review.
- identifying Maori individuals and organisations and other key stakeholders to provide input into the review process.
- developing and implementing an effective consultation strategy that satisfies the Government's treaty obligations as well as the consultation requirement under the GTPP.
- analysing policy options, and making recommendations for consideration by the Government.
- preparing and releasing a Government discussion document on any proposals for reform and seeking public submissions on those proposals.
- analysing submissions and finalising policy proposals for Government approval.
- finalising legislation for inclusion in the next available taxation bill following approval by the Government.
- reporting to Ministers before and after consultation, as appropriate.
- developing an effective communication strategy to inform the Maori community and other key stakeholders of any changes arising from the review.
Issues to be examined in the review
Appropriateness of the current taxation model for Maori authorities and the Maori Trustee
The review will examine the underlying tax policy objectives of the current rules and their appropriateness for the taxation of Maori authorities within the existing framework of taxation. It will also examine how other tax rules, such as the company and trust rules, or rules applying to indigenous peoples in other tax jurisdictions, would apply to Maori authorities and assess any reasons for not applying those rules.
The Maori Trustee is included in the definition of "Maori authority" except in its capacity as collection and distribution agent for rents, royalties and interest. In those circumstances the taxation of income is governed by section HK 14 of the Income Tax Act 1994. The reason for this distinct tax treatment is uncertain and appears to be a source of confusion for both taxpayers and Inland Revenue. The review will consider whether this distinction is valid having regard to the special features of the Trustee.
The definition of "Maori authority"
The definition of "Maori authority" sets the outer boundary of the Maori authority rules. With few exceptions, the rules apply to almost every person(s) administering or controlling property or income in trust for the benefit of Maori. The definition is very wide and would appear to include entities that may otherwise wish to be classified under another taxpayer type, such as a company or trust, notwithstanding the diversity of their objectives and activities. Because there are no explicit guidelines or criteria for determining what a Maori authority is, there is potential for inconsistency in the tax treatment of such entities.
The potential for double taxation of Maori authority income
The four-year rule (in section HI 3(4) of the Income Tax Act 1994) ensures that income distributed within four years of being earned is taxed at the beneficiary level only. However, income distributed after four years is taxed at the Maori authority level at the time it is earned, and taxed again when it is distributed to the beneficiary - which is double taxation. The four-year rule prevents an authority from claiming a refund of the tax already paid on income from which those distributions are made.
This rule may disadvantage Maori authorities because it forces them to distribute their income before the four-year deadline to avoid double taxation, rather than reinvesting the income in the authority. This serves to distort income distribution or retention decisions by authorities. Furthermore, the way the rule functions to prevent double taxation is inherently flawed and can mean that even when the rule is invoked, the full amount of tax paid will never be recovered for distribution.
The appropriateness of "Commissioner discretions"
The taxation of distributions made from a Maori authority is reliant on the discretion of the Commissioner of Inland Revenue. As a result, income which is exempt to the authority, such as treaty settlement money, may become taxable when it is distributed to beneficiaries. This is because the law deems all distributions made from a Maori authority to be "out of income" and, therefore, taxable to the recipient, unless the Commissioner determines otherwise. Distributions made on winding-up are also subject to this discretion.
Another discretion operates when the number of beneficiaries increases from one year to the next and the 20- beneficiary threshold is crossed. This discretion is intended to ensure that income taxed in one year is not taxed again in the next year.
There are no explicit guidelines as to how the Commissioner's discretion will be applied in either instance. The review will consider alternative ways of giving certainty to the tax treatment of distributions made from a Maori authority and the taxation of income when the 20- beneficiary threshold is crossed. The results will be incorporated into the Rewriting the Income Tax Act project, which is considering the appropriateness of certain types of "Commissioner discretions" in a tax system based on taxpayer self-assessment.
The compliance costs associated with the current rules
The application of the four-year rule has associated compliance costs, including those arising from the adverse cash flow consequences, making application for reassessment, and specifying the year in which the adjustment is to be made. The uncertainty surrounding the exercise of the "Commissioner discretions" and the requirement on large authorities to keep a register of beneficiaries to keep track of their whereabouts gives rise to potentially burdensome obligations for Maori authorities. The review will also assess how these rules fit into the Inland Revenue Department's tax simplification project, which is looking at ways of simplifying the information requirements the department places on business taxpayers.
The tax concessions associated with Maori authorities
There is some uncertainty as to whether the Maori authority rules provide penal or concessionary treatment for Maori authorities. This is dependent on:
- whether the entity is a large or small authority;
- the distribution policy of the authority; and
- the tax treatment if the Maori authority tax rules did not exist.
A deduction is also available to Maori authorities for donations they may make to Maori associations under section DI 2 of the Income Tax Act 1994.
Some tax concessions appear to have arisen from administrative practice and to have no basis in law, such as the various exemptions relating to the gross income from sales of indigenous timber and exotic timber.
The review will consider whether the reasons for these tax concessions are still valid today.
The "public purpose" test for charitable status
The review will clarify the "public purpose" test for charitable status, and develop options on ways to amend it to give greater certainty to iwi and hapu-based structures and other entities seeking charitable income tax status. The policy question to be answered here is whether an entity can be charitable if the beneficiaries are connected with that trust through a personal relationship such as genealogy or contract. Although this issue is especially relevant to iwi and hapu structures, the review is not limited to them.
The review will be carried out by officials from:
- the Inland Revenue Department
- the Treasury
- the Ministry of Maori Development.
Activities and planned dates for completion
- Policy development - March 2000
- Develop discussion document - April 2000
- Release discussion document - June 2000
- Main consultation round:
- Pre-consultation workshops
- Main hui - July 2000
- Receive submissions and finalise policy proposals - September 2000
- Approval of policy - September 2000
- Finalise legislation for introduction of legislation - November 2000