Hon Dr Michael Cullen
Minister of Revenue
Towards a stronger, fairer tax system
The Inland Revenue Department gets a funding boost of $35.7 million in the Budget.
Revenue Minister Michael Cullen said the increase was "a significant improvement" on what might have happened had there not been a change in government.
"The IRD was scheduled to take a $30.4 million cut in the 2000-01 financial year. We could not allow that to proceed as it would have damaged the department's ability to do its job properly. This Government is committed to rebuilding capacity in the State sector and to promoting a strong and effective public service," Dr Cullen said.
The additional money would assist the IRD to administer the tax system, discourage avoidance and implement the Finance and Expenditure Select Committee's recommendations to make it easier for taxpayers to understand and meet their tax obligations.
"Legislation is now before Parliament to reduce the incremental penalty for late payment of tax, expand the IRD's discretion to cancel, remit or accept payment by instalment and extend the application of these hardship provisions to all tax types.
"Other initiatives arising from the FEC inquiry on the IRD's agenda for the 2000-01 financial year include a review of the compliance and penalties regime and the re-establishment of a new complaints management process.
"These changes have a common theme, to make the IRD more responsive to the needs of the individual taxpayer," Dr Cullen said.
The Government will introduce legislation this year to require trust distributions of beneficiary income to minors to be taxed at the 33 percent trustee rate. This will limit the benefits of any income splitting through directing trust income to children. Currently this income could be taxed at rates as low as 19.5 percent. By way of comparison, Australia taxes most trust income distributed to minors at 47 percent.
"We are considering allowing limited exclusions to this new rule - for example, for court-ordered trusts.
"We will also legislate to remove the ability of a company to elect the 19.5 percent resident withholding tax rate. Companies which choose the lower rate rather than the 33 cent corporate rate obtain a short-term timing advantage before the discrepancy is made good upon payment of provisional or terminal tax.
"The Government will develop and consult on these proposals over coming months with the aim of bringing them into effect by 1 April, next year," Dr Cullen said.
Contact: Patricia Herbert [press secretary] 471-9412 or 025-270-901
Hon Pete Hodgson
Minister of Research, Science and Technology
Investing in Knowledge
The Government will invest over $43 million in research, science and technology next year, an increase of more than 10 percent, Minister of Research, Science and Technology Pete Hodgson said today.
The increase brings the total public investment in RS&T to $474 million. It includes a record injection of $20.8 million to partner private sector research and development.
"This is a Government that puts money where its mouth is when it comes to building a knowledge economy," Mr Hodgson said.
"We're providing the largest ever increase in Government support for private sector R&D because we want to stimulate it, not just complain about the lack of it. The support comprises a new $11.8 million grants programme and an increase of $9 million in funding for Technology New Zealand.
"We've opted for a grants approach rather than tax deductions because our advice was that grants were more effective. Tax deductions may be unavailable to innovative firms in the start-up phase, when the need for R&D support is often most urgent."
The extra funding for Technology New Zealand takes its budget to $24.7 million. The agency co-funds qualifying businesses to assess their technology needs, investigate new technology and place research graduates in industry.
"We have also increased public investment in basic research," Mr Hodgson said. "This is the work that builds New Zealand's knowledge base and leads to opportunities with major benefits for our society and the economy."
- The New Economy Research Fund increases by $2.9 million to a total of $50.8 million. It opens up new areas of research with an identifiable potential to create whole new types of business for New Zealand.
- The Marsden Fund increases by $2 million to $25.8 million. It supports curiosity-driven research at the frontiers of knowledge that has the potential to be of international significance.
Mr Hodgson said the Budget also introduced a more transparent way of allocating public investment in strategic research, replacing the Public Good Science Fund with five smaller, better targeted research funds.
Some $36 million has been moved from the former PGSF to the New Economy Research Fund, as previously announced. The new research funds include:
- Maori Knowledge and Development- increased by $0.5 million to $3.99 million.
- Social Research - increased by $0.6 million to $4.3 million.
In addition - Health Research has increased by $1.5 million to $33.4 million and funding of $0.55 million has been provided for the new Science and Innovation Advisory Council, which will provide advice directly to the Prime Minister on strengthening New Zealand's innovation system.
"This Budget represents a major commitment by the Government to developing New Zealand as a high-tech, high-skill, knowledge-based economy," said Mr Hodgson.
Contact: Graeme Speden [press secretary] 471-9707 or 025-270-9055
Revenue Strategy
To generate the Government's revenue requirement at least possible economic cost, whilst supporting the Government's equity objectives
This in practice results in the following tax policy priorities:
- maintaining revenue flows
- minimising the economic costs of the tax system
- tax simplification from both a compliance and an administrative perspective
- maintaining and enhancing the integrity of the tax system by ensuring that taxpayers meet their tax obligations, and reducing opportunities for avoidance
- maintaining a direct taxation system augmented by broadly based indirect taxes
- the implementation of policy through the generic tax policy process
- a review of the overall tax system in terms of
- increasing fairness
- increasing economic efficiency
- the extent to which it encourages voluntary compliance.
Tax Revenue Changes Since the 1999 Pre-Election Forecast
The tax revenue forecasts produced by the Treasury and Inland Revenue for this Budget include the effects of both policy changes and forecasting revisions made since detailed tax forecasts were previously published, in the Pre-Election Economic and Fiscal Update.
Policy measures which have been introduced by the present government, and incorporated into the tax revenue forecasts for the 2000 Budget Economic and Fiscal Update, include:
- Cancellation of the previous government's planned personal tax rate reductions.
- Introduction of a new income tax rate of 39% on personal incomes over $60,000.
- Introduction of a new rate for Fringe Benefits Tax, originally at a fixed 64%, but subsequently revised to provide for rates varying with income of the recipient.
- Increasing the floor for New Zealand Superannuation relative to average wages.
- Introduction of rules attributing certain income streams to individuals.
- Increases in the excise rate on tobacco.
- A freeze on many tariff rates, replacing the planned phase down in these rates.
These changes will boost tax revenue, to a limited extent in the current year, but more significantly from 2000/01 onwards, with their full effect impacting from 2001/02. In 2000/01, the additional revenue is estimated at nearly $1.0 billion, while over the subsequent three years, it ranges from $1.2 to $1.3 billion.
In addition to these explicit policy measures, an improvement in prior year corporate profits, generally stronger than anticipated economic performance over the past eight months, and a more favourable economic outlook are all helping to boost tax revenues in the current year and over the forecast outlook period, to June 2004. As a consequence, upward adjustments have been made to tax revenue forecasts, on top of the policy effects.
Details of the revenue impact of the various policy measures, and of the changes due to economic and other forecasting factors, are shown in the table below.
| ($ million) | 1999/2000 | 2000/01 | 2001/02 | 2002/03 | 2003/04 |
|---|---|---|---|---|---|
| Changes due to specific policies | |||||
| Cancellation of tax-rate reductions | 70 | 395 | 415 | 435 | 460 |
| Introduction of 39% tax rate: | |||||
| Source Deductions | 46 | 237 | 255 | 286 | 320 |
| Other Persons | 0 | 176 | 250 | 253 | 286 |
| Fringe Benefits Tax (64%) | 0 | 68 | 69 | 70 | 70 |
| Other | 0 | (14) | (18) | (21) | (23) |
| Raising of NZS Floor | 12 | 46 | 47 | 47 | 47 |
| Anti-avoidance measures | 0 | 10 | 20 | 20 | 20 |
| Split Rate FBT | 0 | (80) | (65) | (65) | (65) |
| Tobacco excise rate increase | 20 | 120 | 120 | 125 | 130 |
| Tariff rate freeze | 0 | 35 | 80 | 85 | 90 |
| Total changes due to policy | 148 | 993 | 1173 | 1235 | 1335 |
| Forecasting changes | 377 | 304 | 252 | 206 | 211 |
| Total change from PREFU to BEFU | 525 | 1297 | 1425 | 1441 | 1546 |
Source: Inland Revenue, The Treasury (compiled from the Budget Economic and Fiscal Update)