Financial planners' and Insurance advisors' Association, Ellerslie Convention Centre, Auckland
Tax reform is like rust – it never sleeps.
As a result of the confidence and supply agreement between Labour and United Future, the term of this Parliament will be marked by a number of major tax initiatives, in addition to those measures already underway, and the ongoing programme of base maintenance through the various tax reform Bills each year.
We will have:
- A major review of business tax arrangements, with changes taking effect from the start of the 2008 tax year;
- A new regime for the tax treatment of charities and charitable donations;
- A government discussion paper released on the merits of income splitting for families.
We have already seen the cancellation of the proposed carbon tax.
All these moves were key United Future policy objectives.
In addition, from the start of April this year, under the extension of the Working for Families package passed through Parliament at the end of last year, a further 60,000 families will become eligible for Family Assistance tax credits.
They range from a family with two children with an income of $45,000 a year receiving $277 a fortnight, through to a similar family earning $60,000, receiving $161 a fortnight.
This morning, I will talk about the business tax review, as well as some other specific issues of particular interest to your sector.
Business Tax Review
No-one now doubts the need for a thorough review of business taxation to ensure our tax arrangements remain at the very least competitive with major trading partners like Australia, encourage investment and promote productivity.
But, pressing as the demand is, simple quick fixes will not work.
The lazy "just cut the rate now, and worry about the details later" approach some have taken to promoting is at best a short-term solution only, whereas the real need is for far more substantive reform.
Chanting simple slogans are not going to be enough – the challenges we face in the international market place are far more comprehensive than that.
Our major trading partner, Australia, is already looking at significant tax cuts to both business and private incomes in next year's Budget and we simply cannot afford to ignore what Canberra is planning.
Against that background, we have to do much better than simply gain a brief, temporary advantage – we have to be far bolder.
The Minister of Finance and I are working actively with Treasury and IRD officials on a range of options along these lines.
We plan to release a discussion paper in the middle of the year setting out these options, to focus debate and invite stakeholder engagement.
Then, we will take decisions in time for legislation to be passed through Parliament next year, so that the new regime can take effect in 2008.
This is precisely the timetable that would be followed for any major tax reform.
Now, let me turn to some specific issues that are before us at the present time, which will be the subject of action this year.
Taxation of investment
In mid-2005 the government released a discussion document proposing comprehensive reform of the tax rules for investment income. Proposals concerned the:
- taxation of domestic investment through managed funds; and
- taxation of offshore portfolio investment in shares
Over 800 submissions were received. Broadly, the domestic proposals were supported by submissions, while the offshore proposals were overwhelmingly not supported
The government is concerned that people saving through NZ managed funds (such as superannuation funds and unit trusts) are taxed more heavily than people investing directly. The reasons for the overtaxation are:
- A managed fund is in the business of investing so is generally taxed on its realised share profits.
- The fund is generally taxed at 33% while many investors’ tax rates are below 33%.
Proposal – investment through collective investment vehicles (CIVs) that elect into the new rules would be taxed as follows:
- Realised gains on shares in NZ companies would not be taxed.
- Taxable income would flow through to investors in the fund and be taxed at investors’ personal tax rates.
Links to KiwiSaver:
- CIV rules are necessary to prevent low income earners investing through KiwiSaver funds from being over-taxed. Therefore it is important to align the start date for CIV rules with the start date for KiwiSaver – so both will start on 1 April 2007.
Offshore tax proposals
- The proposal is to apply consistent tax rules for offshore portfolio investment in shares. This would mean that investments into the seven 'grey list' countries would no longer receive a tax preference.
- Investments into offshore shares through collective investment vehicles would be taxed each year on the investment’s change in value (referred to as the comparative value approach). This would not significantly increase the level of tax paid on such investments (as realised share gains are generally already taxable to such vehicles).
- Investments into offshore shares by individuals would be taxed on a similar basis, but with significant concessions – namely:
- Taxable income would be capped at the greater of 6% of the investment's value and the cashflow from the investment.
- Gains above 6% would be taxed when the investor sells the offshore shares and does not purchase additional offshore shares. (In other words, an investor could switch offshore investments without triggering the additional tax.)
- Individuals with offshore investments valued below NZD$50,000 would continue to pay tax only on dividends.
- Almost all submissions concerned the offshore proposals and were overwhelmingly negative. Key concerns of submitters are that:
- The proposed changes would tax capital gains (when there is no such tax on domestic investments).
- They would increase tax on investments into Australia – so would be anti-CER.
- They would penalise those who have a diversified portfolio.
- The rules would be too complex for individuals to comply with.
- The government is listening to concerns and consulting on a modified proposal for offshore investment that takes account of submitters’ key concerns, while retaining the key policy aims of the original proposals.
- Officials are currently consulting with stakeholders on:
- modifications to the offshore proposals;
- various issues raised with the flow-through proposals for collective investment vehicles.
- The government hopes to be in a position to make some announcements on modified proposals in March this year.
- We are working towards introducing domestic and offshore proposals in a tax Bill in May this year, with application from 1 April 2007.
Salary sacrifice – specified superannuation contribution withholding tax
- The government is concerned about increased tax planning through salary sacrifice and tax planning schemes using the substitution of salary or wages for employer contributions to a superannuation fund. Under present law, the tax rate on employer contributions is based on the marginal tax rate of the employee's salary or wages paid by that employer.
- An officials' issues paper released on 1 February outlined suggested legislative changes to minimise such tax planning schemes.
- The preferred option is to tax employer superannuation contributions at the marginal tax rate of the employee, based on sum of the employee's salary or wages and employer superannuation contributions. The personal tax rate thresholds would be increased by 15% to prevent over-taxation when an employee moves across a threshold as a result of the employer’s contribution.
- Submissions close 15 March. Based on the feedback they receive, officials will report to the government with formal recommendations for change.
- The government intends to include resulting legislative changes in a tax bill to be introduced in May.
Details of the KiwiSaver scheme were announced in Budget 2005. Broadly,
KiwiSaver is a voluntary, work-based saving scheme, due to start in April 2007, to help New Zealanders save. Inland Revenue will generally administer the scheme using the existing PAYE (pay as you earn) tax system.
Savings will be primarily for retirement and will be locked in until age of eligibility for NZ superannuation, although exceptions will be made in certain cases such as financial hardship and withdrawals after a minimum of three years, to contribute towards a deposit on a first home.
One of the key features of KiwiSaver is the portability of a saver’s funds. The scheme will provide the mechanism for the transfer of funds to a foreign superannuation scheme when a saver emigrates.
The government will make an upfront contribution of $1000 per person, to be locked in until the recipient reaches retirement age or for five years – whichever is the greater.
After three years of savings, the government will offer the saver a first home deposit subsidy of $1000 per year of membership, to a maximum of five years.
- Officials have continued working with employers/employer association/providers/and others on the policy design and implementation.
- A KiwiSaver bill is planned for introduction at the end of the month.