Announcements
PUBLISHED 25 September 2009

Revenue Minister's tax policy update

In a tax policy update to the EMA Tax Summit today, Revenue Minister Peter Dunne described the impact on tax policy of the changing economic, fiscal and international environments and the need for the tax administration to deliver greater value for money. Mr Dunne said the government was encouraging debate on what New Zealand's future tax mix might look like but made it clear that no decisions had been made. For more information see the media statement and Minister's speech, and the recently updated tax policy work programme (PDF 106 KB).


Hon Peter Dunne
Minister of Revenue

MEDIA STATEMENT

Dunne: No Govt decision yet on future tax mix

Revenue Minister Peter Dunne today told the EMA'S Tax Summit 2009 in Auckland that the Government has made no decisions on New Zealand's future tax mix.

"We are certainly encouraging debate, and of course we will look closely at the work of the Tax Working Group, which is being co-ordinated by Victoria University, and indeed the Henry Review of the Australian tax system, given the significance of our relationship with Australia.

"However, let me be very clear: the Government has made no decisions – I repeat no decisions – on the future tax mix," Mr Dunne said.

"Those who assume that every utterance or paper released by the Tax Working Group is really a coded effort by the Government to indicate its policy intentions have simply read one conspiracy novel too many," he said.

"There is a long way to go yet. The Working Group has not yet reached its final position, let alone presented it to the Government, so no one should be getting too far ahead of themselves.

"Not only has the Government not discussed these matters, but when it looks to do so, it will need to negotiate them with its support partners," he said.

Mr Dunne went on to say that the Government's overall tax vision today reflects the changes and challenges it faces.

"These can, I think, be condensed into three main issues. The first is the changing economic and fiscal environment. The second is the need to change our tax system to reflect a changing international environment.

"The third is the need for a more efficient and effective – rather than bigger – Public Service; one that provides value for money and meets the public's increasing expectations for service," he said.

"The focus is on having tax policy that meets our ongoing fiscal challenges, and producing an internationally competitive tax system that is supported by a world-class tax administration," Mr Dunne said.

Mark Stewart - Press Secretary, Office of Hon Peter Dunne
Cell +64 21 243 6985


Hon Peter Dunne
Minister of Revenue

SPEECH

Address to Employers and Manufacturers Association's
Tax Summit 2009
'The New Government's Tax Policy Vision - Where to From Here'

Thank you for your invitation to speak to you today on the Government's tax policy vision.

From my perspective as Minister of Revenue, the key themes here are one, change, and two, continuity in the tax environment.

Change and continuity are illustrated by the large omnibus bill that has recently passed its final stages in Parliament.

I introduced that bill as Minister of Revenue in the previous Labour-led government in July 2008, and oversaw its passage through Parliament in the same role in the current National-led government.

The bill contained a number of significant reforms that bring big changes to our tax system.

They include radical reform of our international tax rules, and the taxation of the life insurance business.

This Government's tax vision reflects the changes and challenges it faces.

These can, I think, be condensed into three main issues, which I will talk to you about today in some detail:

  • The first is the changing economic and fiscal environment.
  • The second is the need to change our tax system to reflect a changing international environment.
  • The third is the need for a more efficient and effective - rather than bigger - public service; one that provides value for money and meets the public's increasing expectations for service.

I shall discuss each of these in turn, but before doing so I want to emphasise that Inland Revenue and my Revenue portfolio are not just about collecting tax, or economic and fiscal issues.

Inland Revenue also manages a raft of important social policy programmes, including the KiwiSaver scheme, Working for Families tax credits, student loans and child support.

It also has a key role in the charity sector.

These social programmes are generally about families and our community.

As Minister of Revenue and as the leader of UnitedFuture, I have always taken a particular interest in this aspect of the Revenue portfolio and will continue to do so.

You will probably be aware that I have always pursued policy goals that encourage a culture of charitable giving.

Last year saw the lifting of the caps on the tax relief for donations to charities and other philanthropic organisations.

The taxation bill that passed its final stages in Parliament last week introduced a voluntary payroll giving scheme that will allow employees to make regular charitable donations directly from their pay, as part of an employer-initiated workplace giving scheme.

The scheme will be available to employers who wish to offer it to their employees later this year.

Looking to the future, work continues on other tax incentive options that have been employed in other jurisdictions for encouraging philanthropy and generosity.

For example, the Government is exploring the merits of a gift aid type scheme that enables the tax benefits of donations to go directly to the donee rather than the donor, and making it possible to claim tax relief on items of cultural significance to New Zealand.

I am particularly delighted at the progress we have been able to make under the last two Governments to encourage a stronger culture of giving in our society.

The state-run child support system helps to provide financial support for more than 200,000 children whose parents live apart, or about 20 percent of all dependent children under the age of 19.

It is obviously important that the scheme operates as effectively as possible, and in the best interests of the children involved.

A lot has changed - in patterns of raising children, in workforce participation, and in family law - since the scheme was introduced in 1992.

It is now time to look at updating it in key areas.

To this end, I am planning to release a discussion document soon that seeks people's views on proposals to update the child support formula that determines how much child support a parent must pay.

The proposed changes will take into consideration levels of shared care, the cost of raising children today, and both parents' income.

The consultation will include an online questionnaire for those who wish to express their views in a less formal way.

Income splitting - the idea of allowing families with children to split their incomes for tax purposes, thereby reducing their overall tax liability - also remains an important possibility that needs to be explored.

Indeed, the post-election Confidence and Supply Agreement between UnitedFuture and National includes support to first reading stage in Parliament for a bill giving effect to my party's income splitting policy.

UnitedFuture has campaigned on the idea consistently, and it was floated in a formal government discussion document n April last year, to which there was a good response, showing strong support for income splitting.

That is to be followed up by an officials' issues paper, planned for release by the end of this year.

It will seek submissions on the detailed design of the proposal, and my intention is to introduce legislation next year to provide for a voluntary income splitting scheme for parents raising dependent children.

The fiscal and economic climate is always critical in setting tax policy.

The Government elected last year faced an immediate challenge from the worldwide economic crisis.

The financial meltdown in late 2008 threatened a re-run of the Great Depression of the 1930s - that is how serious things have been.

However, there is now growing confidence that such a scenario has been averted by the actions of governments throughout the world, including ours.

As a small, open economy with high levels of external debt, New Zealand was especially exposed to the economic downturn.

The position now seems to have stabilised, with the official statistics suggesting the recession may be over.

However, while there are positive signs, the world economy is not yet robust.

The hangover from the turbulence of 2008-09 will be with us for some time yet.

The New Zealand Government has gone from budget surpluses to deficits.

The Treasury's post-election, long-term fiscal projections are for budget deficits to remain until 2016 - the decade of deficits the Minister of Finance refers to.

Even then we return to a sustainable fiscal position only by fiscal drag moving the average worker on to the top personal marginal tax rate of 38%.

That is clearly as unacceptable as it is absurd, which is why the Government is committed to moving to an alignment of top personal tax rates, company rates and trustee rates at 30%.

This has long been UnitedFuture's policy and obviously has my full support.

To achieve such alignment while also achieving a sound fiscal position requires us to look again at the tax system in fundamental ways.

This is being done in conjunction with the Tax Working Group, which is being co-ordinated by Victoria University.

The working group is leading a debate on how we can best raise the tax revenue we need.

In doing so it is drawing on the experiences of other countries and their tax systems.

For example, many of them have capital gains taxes and land taxes.

The question is whether there is a place for such taxes in our tax mix here in New Zealand.

This is a discussion we should have; indeed it is one that we need to have - but it is not without considerable political difficulties.

To have this discussion at all might be considered - in the famous words of Sir Humphrey in the 1980s television classic Yes, Minister - "brave or even courageous".

However, if the Government were to take certain issues off the agenda it would only stifle discussion.

So there are times, indeed, where we need to be brave or even courageous.

But those who assume that every utterance or paper released by the Tax Working Group is really a coded effort by the Government to indicate its policy intentions have simply read one conspiracy novel too many.

Let me be very clear: the Government has made no decisions - I repeat no decisions - on the future tax mix.

I trust that this message is clear. It is not code. It is simple and straightforward.

And there will be no decisions until after the Tax Working Group's report and also the report of the Henry Committee reviewing Australia's tax system have been completed, at the end of the year, and we have had a chance to carefully consider the recommendations and implications of both.

Not only has the Government not discussed these matters, but when it looks to do so, it will need to negotiate them with it support partners, including, I might add, UnitedFuture.

At the end of the day, we need a tax system that raises sufficient revenue to meet our significant fiscal challenges, and does so in the fairest and most efficient way.

For my part, I want a broad base, low rate, internationally competitive tax system that serves New Zealand's needs well and fairly.

I have little interest in policies that are more about slogans, or satisfying the politics of envy.

The Tax Working Group process, and the decisions we make arising from its work, will assist the Government prepare for the 2010 Budget and beyond, but it would be foolhardy to jump to too many conclusions at this early stage.

The second of the key issues we face today is how to ensure our tax system remains competitive in a changing world.

This is also a key focus of the Tax Working Group.

We have already begun reform of our international tax rules.

The omnibus taxation bill that passed its final stages in Parliament last week removed tax on offshore active income.

Basically, the idea is that New Zealand needs to grow its own internationally competitive businesses.

That will not happen if they face tax disadvantages that they would not face if relocated to Australia or elsewhere.

And one of those disadvantages was our comprehensive rules for taxing that offshore active income.

We have now moved our rules into line with Australia's.

We will not tax overseas income if it is unlikely to have been diverted from New Zealand.

The next stage in the reform will be to take the policies we have now legislated for and apply them as appropriate, not just to subsidiaries, but also to branches and interests in non-controlled overseas companies. We are therefore continuing a reform programme that was initiated by the last government.

That is continuity.

At the same time, the tax system faces other international challenges as the world changes.

The recent economic turbulence has had a profound effect on tax systems throughout the world.

One good outcome has been the increasing focus on international transparency and co-operation.

The OECD has been running a project for almost 20 years to increase transparency of countries' tax laws and to improve information exchange between tax administrations.

That project had made only limited progress - partly because some significant OECD economies, notably Switzerland, maintained bank secrecy laws that did not allow effective exchange of taxpayer information.

As a direct result of the G-20 meeting April this year, in the aftermath of the economic crisis, that all changed.

Directly after that meeting, the British Prime Minister Gordon Brown stated that the age of tax havens has ended.

Almost all tax jurisdictions have now agreed to OECD standards of information exchange.

At an international meeting in Mexico earlier this month, it was agreed that a new international organisation would be established to carry this through.

New Zealand has been an active participant in this work, and will benefit from the resulting rules making it harder to evade or avoid taxes through the use of tax havens.

Nevertheless, we recognise that these developments will not remove threats to our ability to raise revenue.

Our company tax base, in particular, remains susceptible to international pressures.

New Zealand has, in response, reduced its company tax rate from 33% to 30% and aligned it with the Australian rate.

However, the international trend is for company tax rates to reduce as countries compete for capital and expertise.

As I said earlier, we want to align our top personal rate with the company tax rate, but if the company tax rate falls further that will put added pressure on revenue sources.

That is an issue that the Tax Working Group will need to consider.

We need a tax system that works now and into the future.

In the international sphere, our most critical relationship is with Australia.

What happens across the Tasman has a direct impact on us.

A classic example of that is that when Australia guaranteed deposits in key financial institutions during the economic crisis, New Zealand followed suit.

We had to.

Increasingly, we are an integrated economy.

What happens with tax policy in Australia is, therefore, critical to us.

I referred earlier to Australia's current fundamental review of its tax policy settings, under the chairmanship of Dr Ken Henry, Australia's Secretary to the Treasury.

New Zealand Ministers and officials are following their developments and we are liaising closely with our Australian counterparts over the review.

Dr Henry recently announced that his review will likely recommend a continuation of Australia's company imputation system.

He also discussed the pros and cons of trans-Tasman mutual recognition of imputation credits, keeping this option open.

Although mutual recognition will have a fiscal cost to New Zealand, it would also deliver major benefits in terms of cementing in place the trans-Tasman Single Economic Market.

I shall continue to follow developments closely.

The final key theme I want to address today is the need for a more efficient and effective Public Service, as reflected in the Inland Revenue Department, my area of responsibility.

A world-class, internationally competitive tax system is not achieved by policy measures alone.

We also need a first-class tax administration that collects revenue fairly and efficiently, and delivers services with speed and certainty.

I have been impressed with the improvements made by the department to the recommendations of the Finance and Expenditure Committee's Inquiry into Inland Revenue, which I chaired in 1999.

Nevertheless, there is still room for improvement, as the government seeks to ensure that we get increasing value for money from the Public Service as a whole.

That will not be achieved by increasing the amount spent on the Public Service.

There is simply no money for that.

The Public Service has to think and act smarter - just as the private sector has to do.

Inland Revenue is embarking upon a major transformation exercise.

It needs to move away from the technology and management style of the 1980s, when the FIRST computer system was built, to a model suited to what we need today.

That will mean making increasing use of e-business tools and the internet - tools that simply did not exist in the 1980s.

I will illustrate this point with an example.

Each working day, Inland Revenue posts, on average, over 100,000 envelopes containing various letters.

That is over half a million per week, or more than 25 million letters a year.

It is an impressive amount of mail for a population of a little over four million - if one is simply impressed by large numbers.

It can equally be seen as a rather horrific bombardment of the populace in an age of information over-load.

Perhaps you can guess which position I hold to.

I want to turn the notion that effectiveness is measured by the volume and frequency of correspondence on its head - in my view, a better measure of Inland Revenue's effectiveness in the future will be how few interventions it has with taxpayers, because the tax system is running smoothly, and compliance is more straightforward.

So my challenge to the Commissioner of Inland Revenue is to cut that mail drastically.

He is enthusiastic but it will require some policy changes, which the Government will back.

We need to make those changes if we want to have a 21st century tax administration.

As a first step in the modernisation process, Cabinet has given the go-ahead to legislation that will dramatically simplify the administration of student loan repayments.

The idea is to move away from the time-consuming paper-based management of repayments to electronic management and communication.

A bill giving effect to these changes will be introduced later in the year.

In closing, I would like to return to my opening comments - the Government's tax policy vision is to have a world-leading tax system that meets the needs of the 21st century.

It is a point worth coming back to.

The focus is on having tax policy that meets our ongoing fiscal challenges, and producing an internationally competitive tax system that is supported by a world-class tax administration.

These are our priorities as a government.

Our tax policy work programme, announced in March of this year, has now been slightly revised as a consequence.

There is a lot of continuity in the updated work programme, which contains no surprises.

The changes are largely a matter of re-prioritising so that we are completely focused on the vision that I have described today.

Thank you.