Hon Peter Dunne
Minister of Revenue
Govt announces new tax policy work programme
Finance Minister Michael Cullen and Revenue Minister Peter Dunne today announced the government's tax policy work programme to the end of next year.
"It will be another big year for tax policy," the Ministers said, "with several large reforms continuing and some new projects entering the arena.
"The Business Tax Review, the reform of New Zealand's international tax rules, measures to increase personal savings, and tax changes to increase our international competitiveness have all been carried over from the previous work programme and will continue to be a major focus over the next few months.
"They will be joined by a review of the imputation rules, which will soon get under way. The review will look at issues such as who can use imputation credits and the refunding of imputation credits to charities.
"A discussion document seeking feedback on proposals emerging from the review is planned for release early next year.
"Several other consultative documents on proposed changes will be released for public comment over the next few weeks.
"The next round of consultation on the reform of our international tax rules will take place through the release of an issues paper that looks at the treatment of foreign dividends received by New Zealand residents, as well as transitional and consequential issues – such as the repeal of the conduit rules.
"Other pre-Christmas consultative documents will cover areas such as the taxation of life insurers, further tax incentives to promote charitable giving, details of the proposed exemption for relocation payments and overtime meal allowances, and – as announced in Budget 2007 – further simplification measures aimed at small and medium-sized businesses.
"A discussion document on income splitting is planned for release in April, a project specified in the confidence and supply agreement between the UnitedFuture and the Labour-led government.
"The discussion document will explore the idea of making income splitting available to couples with children, as a way of making it a more viable option for one partner to stay at home, or to work part-time, in order to care for children.
"An omnibus taxation bill scheduled for introduction in May next year is expected to include a number of reforms that are under way, with a focus on changes to the international tax rules," they said.
Rachel Baxter, Tax advisor to Mr Dunne, Tel: 04 471 9728
- International tax review:
- CFC active income exemption and associated proposals
- FIF and branch active income exemption and associated proposals
- Double tax agreements: Australia, Austria, Belgium (protocol only), Czech Republic, Finland (protocol only), Philippines (protocol only), Singapore and Turkey
- Taxation information agreements with Australia and low-tax jurisdictions
- Limited partnerships – tax consequences
- OECD – ongoing commitments
- Bribery – international obligations
- Simplification discussion document
- Compliance and penalties review - ongoing
- Research and development tax credit – implementation
- Petroleum industry
- General partnership tax rules
- Imputation – review of who can use imputation credits
- Tax pooling – refinements
- Loss of profits insurance – timing of proceeds
- Bank thin cap rules – minor remedials
- Shared equity mortgages
- PIE remedials
- FDR remedials
- FDR determinations
- KiwiSaver remedials
- Superannuation – trans-Tasman portability
- Life insurance review
- Emissions trading tax consequences
- Child support – shared care
- Child support – international cooperation
- Income splitting discussion document
- Working for Families tax credits issues
- Volunteers – tax consequences of payments
- Allowances – overtime meal allowances and relocation receipts
- Seasonal workers – final taxation thereof
- ACC and social welfare lump sum assessable receipts
- Cross-border leases
- Associated persons – revision of rules
- May 2007 taxation bill – passage
- May 2008 taxation bill
- Non-disclosure rules re litigation privilege
- Charities – payroll giving
- Charities – a review of other tax incentives for charitable giving
- GST remedials
- Proceeds of Crime (Recovery) Bill
- Student loans
- Niue – technical assistance
SKYCITY Convention Centre, Auckland
Hon Peter Dunne, Minister of Revenue
I am very pleased to have the opportunity to address your conference today.
This morning the Minister of Finance and I are releasing an updated tax policy programme.
The previous update took place in March last year, when we announced an interim work programme for the period of time until the resource and policy requirements of the Business Tax Review were clearer.
The main features of the previous work programme were the Business Tax Review, tax measures to increase productivity and growth, fundamental changes to savings policy, and the review of New Zealand's international tax rules.
Those projects have been carried over to the new work programme and form the bulk of it.
My speech today will be something of a stock-take of progress on some of the reforms that feature on both work programmes, concluding with a few observations about what is coming up next year.
The Business Tax Review is one of several projects that owe their presence on the work programme to the Confidence and Supply Agreement signed between UnitedFuture and the Labour-led government.
A key plank of that agreement was to have a comprehensive review of our business tax rules, for the purpose of ensuring that the system works to give New Zealand businesses better incentives for productivity gains and improved competitiveness.
I will begin my stock-take with a progress report on those projects that are nearing completion.
Business Tax Review
I take pleasure in the fact that several changes resulting from the Business Tax Review will soon be a reality.
A cut in the company tax rate to 30%, an associated cut in the tax rate for certain savings vehicles and a new 15% tax credit for R&D were prominent features of Budget 2007 that resulted from the Business Tax Review.
The two tax rate cuts were enacted in legislation introduced under urgency on Budget day.
The R&D tax credit is part of the taxation bill that is being considered by the Finance and Expenditure Committee and is expected to be passed by the end of the year.
Inevitably, the new tax credit will need finessing, given the complexity and scope of the rules governing it, and given that it is new to New Zealand.
It will also be necessary to ensure that the tax credits work as intended and are sustainable – meaning that they increase spill-over benefits from R&D, therefore making New Zealand businesses more competitive internationally, and do not merely subsidise normal business expenditure.
The government will evaluate the success of the tax credit in three years' time, once the credit has had time to bed in and we can see what the country is getting for its money.
We are also near the end of implementing major reforms designed to encourage personal savings and to improve the way they are used.
Those reforms involved introducing KiwiSaver, relieving the over-taxation of people who save through New Zealand-managed funds, and applying consistent tax rules to offshore portfolio investments in shares.
Many aspects of those reforms have been enacted progressively since last year, and the remainder are contained in the taxation bill currently before Parliament.
As announced earlier this month, the KiwiSaver enrolment figures broke through the 200,000 mark in the first three months of the scheme's operation.
That is an excellent start, and it is encouraging that so many people have decided to join.
These early figures confirm the scheme's wide appeal.
My thinking is that KiwiSaver is here to stay.
If take-up continues at this rate it might be easier to make the scheme compulsory, thereby removing the employer compliance costs associated with people opting out.
Past attempts at having a compulsory government superannuation scheme have failed, in my view, because they took a top-down approach, with governments telling people they had to join.
On the other hand, if people are choosing to join KiwiSaver they are clearly doing it because they want to, which is a very different matter.
I stress that these are my personal views, and are not reflective of government policy at this stage.
However, I do not think this issue will be able to be ignored if Kiwisaver continues to be so successful.
The historic, 15-year rewrite of the Income Tax Act is expected to be enacted by the end of this month.
The very large Income Tax Bill passed through its final stages in Parliament yesterday and is awaiting Royal assent.
I understand work on preparing the assent copy began some weeks ago, so it may be ready for the Governor-General's signature sometime in November.
Given the sheer size of the bill, which is nearly 3,000 pages long, the various printings required as it progresses through Parliament has made its progress through the legislative process much more cumbersome than that of other bills.
The purpose of rewriting the Act is to reduce the compliance costs of those who use it, by producing tax law that is clear, written in plain language and is structurally consistent.
It is vital that users can find what they need in the Act and then understand it.
That strengthens voluntary compliance, upon which the effectiveness of our entire tax system depends.
Enactment of the new Act will be a massive achievement for the many people from both the public and private sectors who have been involved in the rewrite over the years.
In particular, I would like to acknowledge the outstanding contribution of the Rewrite Advisory Panel and its chairman, Sir Ivor Richardson, in steering the project through to conclusion.
The panel will continue its work of examining any unintended changes in the law that may arise from the rewrite of the legislation.
International tax review
To turn to major reforms that are part-way there, the continuing review of New Zealand's international tax rules will be a major focus for the government over the next year.
The emerging reform represents a fundamental change in how we tax the offshore income of our controlled foreign companies.
We are moving from a system of taxing offshore income as it is earned, to exempting active offshore income from tax.
That is a fundamental change that will put an end to our lonely position of being the only country that taxes its businesses in this way, and it will bring us into line with the practice of other countries.
More importantly, the reform will put New Zealand businesses on a better footing internationally by freeing them from a tax cost that the controlled foreign companies of other countries do not face.
The government is working hard to design a system that is simple for businesses to work with and, at the same time, preserves the integrity of our tax system.
Achieving these twin goals is something of a balancing act that involves trade-offs.
We are examining features that make it easier for active businesses to take advantage of offshore activities – such as exempting active income and repatriated dividends, and a simple test that will relieve active businesses from any further tax payment or calculation.
Base protection will be achieved through reasonably relaxed thin capitalisation rules, a targeted definition of "passive income" to be subject to continued attribution, and technical rules designed to inhibit tax arbitrage.
We have taken as much care as possible to avoid application of these rules to ordinary business transactions.
Most of the New Zealand businesses that were consulted will not be affected by these rules because they will be below the thresholds set for their application.
To ensure that the new system takes into account the realities of the New Zealand business environment, my officials consulted extensively with individual companies last year, following the release of the government discussion document that set out the broad direction of the reform.
Following on from the announcement in Budget 2007 that the government will proceed with the development of an active income exemption for New Zealand-controlled foreign companies, an issues paper released earlier this month seeks feedback on suggested details of the exemption.
The consultation process will continue next month, with the release of a second issues paper.
It will look at the treatment of foreign dividends received by New Zealand residents, as well as transitional and consequential issues such as the repeal of the conduit rules.
The reform will be a central feature of the taxation bill planned for introduction in May next year and will come into effect from the 2009-10 income year.
In principle, there is a strong case for applying the active income exemption to non-portfolio foreign investment funds and branches.
For this to be achieved, however, a number of potential concerns will have to be carefully considered.
The government's first priority has to be the successful implementation of the core policy – an active income exemption for controlled foreign companies.
Work on extending the exemption will therefore form the next stage of the reform process.
Consultation on that second stage will take place next year, with a view to introducing proposed legislation in 2009, with effect from the 2010-11 income year.
We are also mid-way through a comprehensive review of the life insurance tax rules.
The current rules date back to 1990 and, clearly, much has changed since then, in both the life insurance industry and in the commercial environment in which it operates.
As new products and ways of doing business have developed, anomalies and inequities in the rules have emerged.
In many cases, term insurance profits are under-taxed, with profitable business often leading to tax losses.
On the other hand, aspects of policyholders' life insurance savings income are over-taxed.
So far the review has involved fairly intensive consultation that has included the release of two issues papers, the second seeking the industry's views on a range of possible changes.
The next step will be the release of a government discussion document that sets out formal proposals for legislative change, with the aim of including the changes in next May's taxation bill.
Tax incentives to promote charitable giving
The development of a new rebate system for charities was another major plank in the confidence and supply agreement between United Future and the Labour-led government.
The reason for making it part of the confidence and supply agreement is my belief that giving to charitable organisations, whether of time or money, makes a huge contribution to our well being.
I also believe that it should be recognised, rewarded and encouraged – and that some of that can be achieved through the tax system.
The first step towards providing tax incentives to strengthen charitable giving was taken in Budget 2007, which announced the removal of limits on the amount that individuals, companies and Maori authorities can donate and still qualify for the associated tax rebates and deductions.
Those changes, which laid the foundation, are part of the taxation bill before Parliament and will take effect from April 1 next year.
I am aware that your institute has questioned whether removal of the tax caps can increase charitable giving, and I accept that there is no clear consensus on whether tax incentives can increase philanthropy.
The international experience is that tax incentives alone are unlikely to make a big difference to philanthropic attitudes or behaviours.
However, they have a greater chance of working if combined with other measures, such as better publicity for the charitable sector and other promotional activities.
I see removal of the caps as the first of many measures that can be employed to strengthen our culture of charitable giving.
The next step is to make charitable giving easier.
One possible way of doing that is to introduce a system of making charitable donations through payroll deductions, as is done in Australia and the United Kingdom.
If we did adopt payroll giving, and it is just an idea at this point, we would have to ensure that it would not raise undue costs for employers and that it would be easy to administer.
If adopted, payroll giving would be voluntary on employers.
A discussion document exploring the idea will be released next month.
As part of the move towards simplification, another issues paper planned to go out shortly will look at the legislative uncertainty about how reimbursement payments made to volunteers should be taxed.
It will also look at similar problems relating to payments of honoraria.
These are longstanding problems, and resolving them once and for all will make a big difference to non-profit organisations and their volunteers.
We will also be looking at other mechanisms for delivering tax relief for charitable donations.
Among the measures under consideration are gift aid schemes, similar to that in the United Kingdom, which makes it possible to claim tax deductions for non-monetary donations.
My party has a strong commitment to the voluntary and community sector, and the contribution it makes to our overall national wellbeing, which is why we have promoted such a comprehensive approach.
I see that one of the topics on your conference agenda is the officials' issues paper on possible changes to the definitions of "associated persons" in the Income Tax Act, which was published earlier this year.
The paper looked at tightening the current general definition of associated persons as well as the definition used for land sales.
The suggested changes relating to land sales attracted considerable attention in submissions, many of which argued that the changes would prevent developers from holding non-taxable investment portfolios.
At this point, it is important to note that Parliament decided in 1973, when it enacted the current land sale tax rules, that land dealers, developers and builders cannot generally hold land on capital account.
This means that gains on properties sold by developers within ten years of acquisition are generally taxed.
That was a deliberate decision, and Parliament meant what it said.
The issues paper highlighted how the rules can be circumvented by some relatively simple structures and suggested that the law be amended to prevent that.
I understand that tax policy officials will be discussing possible refinements to the suggested changes in two sessions to be held at this conference, so those interested can explore the matter in depth there.
Officials are finalising their analysis of submissions on the issues paper and are expected to report to Ministers shortly, with recommendations for legislative changes to be included in the next taxation bill.
The government also remains committed to simplifying the tax system as far as possible.
This is a continuing process and one that will never be completed, I suspect.
Recent years have seen the introduction of a great many tax changes, large and small, aimed at tax simplification, reducing compliance costs and making it easier to run a business.
As announced in Budget 2007, a discussion document to be released over the next few weeks will explore further tax simplification measures aimed at small and medium-sized businesses, such as raising a number of business tax thresholds.
These will not be major reforms, but they will have an important role to play, nevertheless.
In a similar vein, the government announced this week that it would introduce legislation to ensure that employer payments for employee relocation expenses and overtime meal allowances are not taxable to employees.
The announcement corresponded with the release of a draft interpretation by Inland Revenue that saw these payments as taxable under the current wording of the legislation.
The government is taking a pragmatic approach here, moving to clarify the legislation to remove uncertainty about the matter and to enable employers to get on with running their businesses.
An issues paper seeking feedback on the details of the proposed clarification will be released shortly.
Limited Partnerships Bill
As you may know, the Limited Partnerships Bill is under consideration by Parliament's Commerce Committee.
The bill has been generally welcomed by the public. It creates a new limited partnership entity, codifies tax rules applying to general partnerships and adds new tax rules for limited partnerships.
The new rules on limited partnerships are intended to increase our international competitiveness and should help to attract venture capital investment to New Zealand, as well as be a useful entity structure for many other businesses.
I expect the bill to be reported back in time to be enacted by the end of the year.
I would like to turn now to some forthcoming policy developments.
In April, the government will release a discussion document on income splitting, another project to emerge from the confidence and supply agreement between UnitedFuture and the Labour-led government.
Income splitting for tax purposes is allowed in a number of other countries and takes a variety of forms.
In most countries, income splitting is a matter of allowing couples to lower their total tax liability by allocating some of the higher earning partner's income to the lower earning partner, thus mitigating the effects of the progressive nature of tax rates.
My focus, however, is on families with dependent children, and I see income splitting limited to them.
It is a possible way of making it viable for one spouse to stay at home, or to work part-time, in order to care for the children of the family.
The discussion document will set out how an income splitting system might work in New Zealand, and it will consider whether income splitting is the best way to achieve this goal, or whether there are better means of doing that.
The government's review of the imputation rules gets under way in earnest soon.
It was listed on the previous work programme as well but was one of several projects that had – temporarily – lower priority than the changes resulting from the Business Tax Review.
The present rules on who can use imputation credits are the subject of frequent debate, which may indicate that the law needs to be clearer.
It may also indicate that it is time to conduct a first-principles review of what imputation credits are intended to do and whether current law achieves that.
A review is timely, since the law must keep up with and allow for normal commercial practice – for example, the growing use around the world of private equity.
The main focus of the review will be on revisiting the policy on who can use the imputation credits.
Matters that will be considered include whether it is appropriate for companies to be able to stream imputation credits to particular shareholders. The review will also cover the refunding of imputation credits to charities, their use by trusts and the impact of pending changes to the international tax rules.
A discussion document seeking feedback on proposals emanating from the review is planned for release in the first part of next year.
To turn briefly to a piece of legislation enacted in 2005, I am aware that a number of accountancy firms would like the non-disclosure right to be extended to discovery in litigation proceedings.
The non-disclosure right is a right not to disclose documents providing confidential tax advice that the Commissioner of Inland Revenue has requested under his statutory powers to obtain information.
It was enacted to provide a degree of consistency for tax advice with the current privilege enjoyed by lawyers.
However, it does not apply to discovery.
While, in principle, I support extending non-disclosure to discovery, before any decisions can be made on the matter, there are practical issues that require further consultation – for example, its interaction with the High Court rules.
I have instructed my officials to consult with interested parties.
Ministers will then be in a position to consider the matter fully.
Tax cuts, Budget
Also coming up next year, of course, is the Budget, which leads on to the subject of tax cuts, which are very likely to be a major theme in the lead-up to the general election.
My colleague the Minister of Finance has stated on several occasions that personal tax cuts will be considered in the context of Budget 2008.
I have long advocated a 30/30/30 approach to tax rates.
That would see the top personal tax rate and the trust tax rate reduced to 30%, in line with the new 30% company tax rate, itself a direct result of the Business Tax Review.
We are half there already as a result of this year's Budget with the changes to business tax rates, and the tax treatment of certain savings vehicles.
In my view, personal tax cuts are long overdue, and I believe there is scope to include them in next year's Budget.
Most New Zealanders are in favour of tax cuts, and you can rest assured I will continue to push for lowering personal rates.
In conclusion, I would like to repeat my appreciation of the role that NZICA and the tax community generally play in the development of tax policy.
I know that you sometimes groan under the sheer weight of the consultative exercises that appear before you, and that your participation in them consumes precious resources.
On the other hand, your participation is vital to the development of effective tax law that works in the real world – hence the need for your views and experience.
We are fortunate to be a small country where it is possible to communicate easily with each other about tax concerns, and to have the infrastructure for doing that.
I wish you all the best for your conference.