Swain addresses tax update seminar
The Associate Minister of Revenue, Paul Swain, addressed the Deloitte Tax Update Seminar today and yesterday. In his speech he outlined Government tax simplification initiatives and forthcoming discussion documents on the subject. For more information see speech.
Address to Deloittes' Tax Update Seminar
Deloitte House, 8 Nelson St, Auckland
Thank you for the Invitation to speak to you today.
I have been asked to talk about current tax developments from a government perspective. In particular the 2001 tax review and Trans-Tasman tax issues. I also want to look at tax simplification and the government's investigation into business compliance costs.
Late last year I was appointed Associate Revenue Minister. Michel Cullen maintains the overall ownership of the portfolio and deals with the major tax structural matters. My particular designation is on tax simplification. I do have an interest in both areas and will look at both but my particular issue is the latter.
If we are to look at tax developments from a government perspective we need to take a look at what the government has identified as the most important issue facing New Zealand at the moment. That is - the transformation of our economy from one that is overly dependent on commodities to one where information and knowledge both add and generate value for traditional and new products and services.
Our concern is to lift New Zealand's economic performance. Our broad vision is to see our nation back in the top half of the OECD over time.
Achieving that is going to take every ounce of effort from us all - business, communities, individuals, educators, researchers, and government.
Our shared vision will see us committing to being innovative, creative, enterprising, wealth generating, collaborative, caring, and achieving globally.
Part of that is ensuring we have a tax system that facilitates New Zealand's participation in the knowledge economy. We have to investigate ways of reducing compliance barriers to business taking part in the global economy and ensure our tax system reflects international schools of thought.
At the same time, the government will need to deliver on its election promises, and ensure that all New Zealanders can take part in the new economy, through access to things like education, skills training and health care.
This is a tricky task. To coin the phrase of the Business Compliance Cost Panel, which I will talk about later – it's about finding the balance.
With that in mind I'd like to go into some of the specific areas you asked me here to talk about.
The Tax Review
As you will be aware this was released by the McLeod Team two months ago, and submissions on it have just closed. It was an independent and radical analysis that raised a number of issues both in policy and technical areas and sparked a lively "first principles" debate on taxation.
The Review is now conducting a second round of consultations before reporting finally to the Government in October this year.
Until the final report in October the government is refraining from commenting directly on specific issues the inquiry has raised except to say that we have ruled out the issue of new tax on owner occupied housing.
I want to re-emphasise the fact that no proposals for significant tax change from the Review will be implemented without first seeking a mandate from the electorate through the 2002 general election.
Trans-Tasman Tax Issues
Earlier this year Michael Cullen announced that New Zealand and Australian officials were working on an issues paper that will propose a mechanism for relieving the trans-Tasman taxation problem. It arises when Australians or New Zealanders invest through a company resident in the other country that earns income in the country of the shareholder.
Australia and New Zealand allow only tax paid in their own countries to generate imputation credits, and only resident companies to pass on imputation credits to their shareholders. Overcoming this barrier requires a bilateral approach. Work on the issues paper is proceeding, and it is expected to be published by the end of the year.
Many of the issues on the Government's tax policy work programme are organised under three major themes. The first is ensuring that the tax system is appropriate for the changing world economy in which New Zealand businesses must operate. The second is the taxation of savings and the entities through which individuals invest and save. The third theme, which I am particularly passionate about, is tax simplification.
Tax simplification – More Time For Business
Our tax system must be capable not only of raising the necessary revenue, but also of minimising compliance costs for New Zealand businesses that operate here and overseas.
In May we released the first in a series of discussion documents devoted to different aspects of tax simplification. "More Time for Business" looked at possibilities for simplifying the tax system from the perspective of small businesses, which make up the majority of New Zealand businesses.
"More Time for Business" presented new ideas to help businesses meet tax obligations as part of their normal business activity. In particular:
- Provisional tax: Small businesses could pay provisional tax to match cash flow, rather than paying it in three equal payments throughout the year.
- Use of money interest: Reduce interest costs by allowing taxpayers to pool provisional tax payments.
- Employers and PAYE: Employers could reduce exposure to penalties and interest by using intermediaries such as payroll firms when collecting and paying PAYE.
- End-of-year tax adjustments: Requirements associated with end-of-year income tax calculations for small businesses, such as trading stock valuations, could be reduced.
- Simplifying requirements: Other forms and processes could also be simplified. They include exemption certificates for non-resident contractors' withholding tax and the resident withholding tax certificates sent out by financial institutions.
- Benefiting from information technology: Recent advances in information technology can help to reduce tax compliance costs by reducing the need for businesses to communicate with Inland Revenue, simplifying the calculation and payment of tax, simplifying the filing of returns, and improving the administration of the tax system.
We received generally supportive submissions from a wide variety of individuals and groups on this document - and there were many new suggestions on ways to simplify the tax system. We will be working through those new ideas to see what benefits they would create and see whether they are feasible.
Proposals that were widely supported in submissions and that can be developed in time will be included in the December tax bill.
The second in the series of tax simplification discussion documents is being released this week. It will deal with simplifying the income tax rules that apply to the broad range of organisations known for tax purposes as "Maori organisations". We hope to reduce their compliance costs and prevent double taxation.
Compliance and penalties
Next week will see the release of the third publication in the simplification series. It is part of the Government's post-implementation review of compliance and penalty rules in the Tax Administration Act, which came into effect in 1997. As you may know, the Generic Tax Policy Process incorporates a review of new legislation once it has had time to bed in, to see how and where it could be improved. As in the other stages of the process, the post-implementation review involves consultation - hence the discussion document.
The discussion document will also deal with matters arising from the 1999 inquiry of Parliament's Finance and Expenditure Committee into the powers and operation of the Inland Revenue Department.
The inquiry highlighted the problems faced by taxpayers who find themselves in difficulty because of a tax debt. Although the Government has already introduced legislation to reduce tax penalties, the discussion document will respond further to the concerns expressed during the inquiry.
The Government is particularly keen to replace the rules that provide relief to taxpayers in debt who face hardship. The current rules were developed in the 1930s and are deficient from both the perspective of taxpayers and that of an efficient tax administration. The proposed rules are intended to be fairer and clearer and to encourage taxpayers to deal with their debt problems early rather than letting them become insurmountable.
Another area of priority addressed by the discussion document is the ability of taxpayers who have overpaid their tax to seek to have the excess credited against a past or future liability of their own or of another taxpayer. This is commonly done to reduce exposure to use-of-money interest on underpayments of tax. The absence of clear rules has sometimes led to inconsistency and confusion.
Rewriting the Income Tax Act
The next publication in the simplification series will be the draft of the rewritten Parts A to E of the Income Tax Act. It is expected to be published in September.
It is the result of several years' work. The Income Tax Act, as you know, is a very old piece of legislation dating back more than a hundred years, although it has expanded significantly since then and been recast on several occasions.
The Act was reordered in 1994 and gained new core provisions in 1996. Work over the last few years has concentrated on refining the new structure and progressively rewriting Parts A to E of the Act. The purpose is to produce legislation that is clear, uses plain language and is structurally consistent.
The rationale is clear: tax law that is easier to understand and to use saves time and reduces compliance costs and administrative costs. It is also easier to comply with. I hope that those of you here who are interested in the rewrite of this fundamental legislation will take the opportunity to examine the exposure draft when it is published and give the project team your feedback.
Turning now to savings. As Michael Cullen said at the Deloittes seminar in Wellington just a few weeks ago, we are looking to reform the rules on the taxation of savings for retirement through private superannuation schemes. As a first step, officials are consulting with representatives of the savings industry on ways to increase private savings, they are to report by the end of the year.
Tax and charities
We recently extended the deadline for submissions on the Tax and Charities discussion document to the end of August. We did that in recognition of the fact that there is a high level of interest in the subject, and it's important we get the framework right.
Charities make an invaluable contribution, and in recognition are given support through the tax system. Most of that support comes in the form of an income tax exemption for charities and a tax rebate or deduction for charitable donations.
We are recommending a number of changes including:
- Raising the maximum tax rebate for individuals from $500 to $600.
- Changing the law to clarify that charities and other non-profit bodies are allowed to claim GST refunds on most of their activities.
- Modernising the 400 year old definition of a charity.
- Putting the profits of charity trading operations on the same tax footing as those of other businesses.
- Profits used for the charitable purpose for which the charity was set up will not be taxed.
Business Compliance Cost Panel
I would like to talk briefly about the report of the Ministerial Panel on Business Compliance Cost. The Panel called the report "Finding the Balance – Maximum Compliance at Minimum Cost." This was chaired by Alan Dunn and reported to the government recently. It has reconfirmed that compliance costs remain a continuing source of frustration for New Zealand businesses. The panel, made up primarily of business people, was set up to ascertain businesses' views on compliance costs and how they could be reduced. It canvassed a very wide range of compliance cost issues, ranging from the Resource Management Act to ACC, and it made a large number of recommendations for reducing costs.
An interdepartmental group of officials has begun work on analysing the recommendations. The Government's preliminary response to the recommendations will be released by the end of this month and the final response in December this year.
There is an obvious link between simplifying the tax system and reducing the compliance costs associated with taxation. As has been noted many times before, however, tax simplification is not always a simple matter. Moreover, there is no single "fix" that will simplify all tax obligations for all businesses. The Government's approach to tax simplification for business, therefore, is to tailor simplification efforts to specific groups and tackle it from different angles.
The question is – where to next – what happens at the end of all of this consultation over discussion documents and analysis of feedback?
We are planning to introduce tax bills in December this year and May next year. Both will focus on implementing proposals outlined in the tax simplification discussion documents I have talked about here.
You can expect the December bill to include legislation for the simpler proposals from More Time for Business such as extending non-filing, simplifying family assistance, reducing filing requirements for companies, reducing costs around non-resident contractors, and exempting small stock holders from the trading stock rules.
With respect to the review of compliance and penalties legislation it is a priority for us that new rules are introduced in the December Bill to help taxpayers facing debt and hardship as well as introducing clear rules for the transfer of excess tax. Proposals from the GST and imported services discussion document will be included as will any legislation resulting from the review of tax and charities.
Can I just take this chance to encourage you to make submissions on the remaining discussion documents this year. It is important that we hear from business what they think of the proposals we are putting forward before we make any decisions. All of the documents are being posted on the IRD website (www.taxpolicy.ird.govt.nz) as they become available.
Thank you for your time and I wish you a very successful seminar.