Financial Planners and Insurance Advisors Association
Wellington, 14 March 2006
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, with work under way later this year;
- A government discussion paper released on the merits of income splitting for families, probably in early 2008.
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.
And last week, the Minister for Racing announced the proposed changes to racing industry taxation, in line with the Labour/New Zealand First confidence and supply agreement.
No wonder the commentators describe our tax reform agenda as "Herculean".
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
The government is undertaking a thorough review of business taxation to ensure our tax arrangements remain, at the very least, competitive with major trading partners like Australia, and to encourage investment and promote productivity.
The Minister of Finance and I are working actively with Inland Revenue and Treasury officials on a range of options.
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.
Current tax policy projects
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 using a 6% capped approach:
- Taxable income for a year would generally be a maximum of 6% of the investment's value.
- 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.
- Taxable income for a year would generally be a maximum of 6% of the investment's value.
- 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, and various issues raised in relation to the flow-through proposals for collective investment vehicles.
- The government hopes to be in a position to make some announcements on modified proposals next month.
- One proposal that has been mooted would see the removal from the rules of constraints on Australian-resident listed companies.
- 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 the sum of the employee's salary or wages and employer superannuation contributions. Specified superannuation contribution withholding tax thresholds would be raised by 15% over the equivalent personal tax thresholds. This would minimise the possibility of over-taxation when an employee moves across a threshold as a result of the employer's contribution.
- Submissions close this week. 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 the tax bill to be introduced in May.
- Details of the KiwiSaver scheme were announced in Budget 2005, and the resulting legislation was introduced into Parliament on 27 February.
- 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 worked with employers/employer association/providers/and others on the policy design and implementation.
- The KiwiSaver Bill has been referred to the Finance and Expenditure Committee for consideration.
Other measures on government's tax policy work programme
On 3 March I announced the contents of the government's new tax policy work programme.
The work programme is an interim one until the resource and policy requirements of the business tax review are clearer. The review will involve a substantial commitment of resources.
A major objective of the work programme is to encourage savings and improve the way they are used. In this category are measures relating to taxation of investment, the KiwiSaver legislation, and extreme salary sacrifice – which I discussed earlier.
Other key objectives of the work programme are as follows.
Work programme measures to encourage productivity, growth and international competitiveness include:
- Review of level of withholding tax rates covered in our double tax agreements, including the very important DTA with Australia.
- Review of the tax rules that govern outbound investment from New Zealand into foreign subsidiaries. It has the potential to affect the tax rules on controlled foreign companies, foreign dividend withholding payments and conduit relief.
- Legislation to exempt job-related superannuation schemes in Australia from New Zealand's foreign investment fund rules – to remove a disincentive to Australians and returning New Zealanders who want to come here for long-term employment.
- Continued work on a range of further tax depreciation issues.
- Work on tax issues relating to exploration and development of geothermal energy and issues raised by the petroleum industry.
Work programme measures to ensure the tax system operates smoothly, fairly and efficiently include:
- Review of the tax implications of the new International Financial Reporting Standards.
- Continued review of partnerships, following on from the development by the Ministry of Economic Development of new limited partnership rules.
- Completion of the rewrite of the Income Tax Act, with the introduction of the final rewrite bill planned for later in the year.
- The bill introduced in May last year is before Parliament and is expected to pass by the end of the month. Major reforms in the bill include changes to the tax depreciation rules, fringe benefit tax and securities lending rules.
- The first taxation bill for 2006 is expected to be introduced in May.