Address to New Zealand Payroll Practitioners Association Annual Conference
Ellerslie Racecourse, Auckland
I am very pleased to be with you today at the opening of your second annual conference.
I am aware of how very important your profession is to the smooth operation of the tax system and, by extension, to New Zealand's economy, and I want to acknowledge the contribution you make.
The PAYE system, in which you play a key role, is crucial to the collection of tax revenue.
In the year to June, Inland Revenue collected over $22 billion in PAYE deductions, which account for 37 percent of all government tax revenue.
Then there is the raft of social policy programmes that operate via payroll systems – such as student loans, child support, and KiwiSaver, to name just a few.
If you did not perform your job with such competence, I suspect that much of the tax system, as well as a number of social policy programmes, would simply fall over.
In my speech today I would like to briefly update you on some of the tax policy and legislative developments that affect your area of expertise.
There have been a lot of tax changes, many of them with payroll implications, since the general election, just over a year ago.
December saw the introduction and passage under urgency of tax measures announced in the lead-up to the general election.
Those changes included a three-year programme of personal tax cuts, introduction of an independent earner tax credit, repeal of the research and development tax credit, and changes to KiwiSaver.
In February of this year the Government announced a series of legislative changes aimed at making it easier for small and medium businesses to manage their cash flows and meet their tax obligations in what was a time of global financial crisis.
Those changes were enacted by March.
This year's Budget announcements included the deferral of personal tax cuts that were to have taken effect over the next two years, to prevent further increases in government debt.
A taxation bill giving effect to those and other tax changes was introduced under urgency on Budget day, passing its final stages on the following day.
Throughout all this, the substantial taxation bill that had been introduced in July 2008 slowly progressed through Parliament, passing eventually in September.
It introduced a number of major business reforms, including the first stage of the reform of New Zealand’s international tax rules, reform of the taxation of the life insurance business, and the introduction of payroll giving.
Another omnibus tax bill was introduced in July of this year.
Its focus is on new withholding tax rates on interest paid to individuals, to align those rates with personal income tax rates.
That bill is expected to pass before Christmas.
Looking back on it all, this has been an extraordinarily busy year on the tax front, not only for the Parliament, policy-makers, law drafters and tax professionals, but also for the many unsung heroes who have to make all these changes work.
As Minister of Revenue, I have long had an interest in promoting the charitable sector and charitable activity, which makes an important contribution to our social, cultural, environmental and economic well-being.
New Zealanders are generous in giving money and time for charitable purposes.
An estimated one million Kiwis take part in voluntary activities of one kind or another and they donate millions of dollars to charities and other non-profit organisations.
I am very proud to be associated with a number of changes over the last three or four years that have progressively strengthened the culture of charitable giving in this country.
Those changes range from removing the caps on the dollar amounts of charitable donations which are eligible for tax relief, to removing tax barriers to people giving generously of their time, to the introduction of payroll giving.
The new payroll giving scheme, which comes into force on 7 January, will enable people to donate to charitable and philanthropic causes through voluntary work-based payroll deductions.
The scheme will be voluntary for employers as well.
It will operate through the PAYE system and will be available to employers who file their employer monthly schedules electronically.
The introduction of payroll giving was one of several options that were subjected to extensive consultation, and it received strong public support.
A number of other countries have introduced payroll giving to encourage greater giving to charities and other non-profit organisations.
Their experience shows that payroll giving can have a number of benefits.
For charities, payroll giving can be an efficient, low-cost way to raise funds, and it can help to deliver the regular income support they need.
For employees, payroll giving provides a convenient and simple way to donate to charities of their choice.
In particular, it eliminates the need to collect receipts or wait until the end of the year to obtain the tax benefit of donations.
For employers, payroll giving can provide a low-cost and administratively simple way to support employee engagement in the community, while building employee morale and mobilising significant funding and volunteer resources for community benefit.
Some have already introduced payroll giving.
Others have expressed an interest but say they want to be sure they would not encounter undue compliance costs by introducing payroll giving into their workplace.
And this is where payroll developers can help, by developing systems that make payroll giving low-cost and hassle-free for their clients or employers.
Now I want to turn briefly to KiwiSaver, another area in which your profession plays an important role.
Since it came into force in 2007, KiwiSaver has been a great success, exceeding most people’s expectations.
Membership at the end of October this year had reached 1.2 million, having grown by 54 percent in the second year of its existence.
That translates to about 32,000 new savers joining every month, which is very impressive.
In the same year, $2.1 billion in contributions from members, employers and the Crown were passed from Inland Revenue to providers for investment, more than double the amount for the first year of operation.
I think we can safely assume that all the big changes to KiwiSaver have now been made.
The future should bring only fine-tuning of the legislation.
For example, a tax bill to be introduced later this month will contain a number of refinements to the legislation.
They include a new set of rules governing the enrolment of people who are under 18 and amendments that provide greater consistency between the PAYE rules and KiwiSaver rules for school children.
The bill will also provide for trans-Tasman portability of savings between certain Australian superannuation funds and KiwiSaver funds.
That is good news for people who have retirement savings in both countries and want to consolidate their savings in New Zealand.
The final big issue I want to address today is the need to modernise Inland Revenue systems, including the critically important PAYE system.
This is especially important at a time when the government is pushing to ensure that we get increasing value for money from the public service as a whole, at a time when every tax dollar counts.
With that in mind, Inland Revenue is embarking upon a major transformation exercise.
It needs to move away from the technology and management style of the 1980s, when its FIRST computer system was built, to a model suited to the present century.
That will mean making increasing use of e-business tools and the internet, tools that did not exist in the 1980s.
Let me illustrate this point with an example I have used on several occasions, because it is a very good example.
Each working day Inland Revenue posts, on average, over 100,000 envelopes containing various pieces of correspondence.
That is over half a million letters a week, and over 25 million letters a year.
It is an impressive amount of mail for a population of a little over four million people.
Inland Revenue knows that it has to cut that mail dramatically.
Sreamlining the system will require some policy and legislative changes, which the government will back.
The first step in the modernisation process is to simplify the administration of student loan repayments.
The idea is to move away from the time-consuming paper-based management of loan repayments to electronic management and communication.
A bill giving effect to those changes will be introduced early next year.
The next step in the transformation process will be to look at what can be done with PAYE and the personal tax summary systems.
The employer monthly schedule is the key vehicle for operating the PAYE process.
When it was introduced, in 2000, the employer monthly schedule provided an efficient mechanism through which Inland Revenue could interact with employers in the collection of payments and information.
It also removed the need for employers to carry out an annual PAYE reconciliation and for employees to complete an annual income tax return.
However, over the years, pressure on the schedule has mounted, and it has now reached the limits of the amount of information it can contain.
The schedule has now become so complex that employers now make a lot of errors in completing it, requiring greater Inland Revenue intervention.
Despite Inland Revenue's efforts to get employers to move from paper filing to electronic filing, only about 28 percent of the 180,000 schedules that Inland Revenue receives are sent electronically.
I have even been told of a group of about 20,000 employers who calculate their PAYE deductions electronically and then print them out, put them into an envelope and post them to Inland Revenue.
All this has led to the processing of employer monthly schedules becoming very expensive and less sustainable by the year.
The implementation of future tax and tax-related social policy changes, and there will inevitably be some, will be seriously compromised if the employer monthly schedule has to accommodate even more information.
The only answer is to go electronic and, as with student loans, get rid of the paper, the telephone contacts, and the manual interventions.
With that in mind, Inland Revenue has been giving serious consideration over recent months to what a future PAYE system might look like, one that is fast, efficient and gives greater certainty to all involved.
Any changes to the PAYE system will subsequently affect the personal tax summary system, which is also operating at capacity.
The personal tax summary replaced the requirement for individuals who earned income solely from salary and wages to file a tax return.
When the personal tax summary was introduced, it was envisaged that only a small minority of individual taxpayers, perhaps about 400,000 at most, would request one.
All that changed with the addition over recent years of numerous social policy programmes that interact with the tax system, and the advent of personal tax summary intermediaries, who have stimulated great public interest in acquiring a personal tax summary.
Increasing numbers of individual taxpayers are requesting an end-of-year square-up, which means a growing number of interactions with Inland Revenue have to take place.
Inland Revenue has begun initial planning for moving the tax administration into the 21st century, work that includes much more than strengthening its technological capabilities.
It also includes coming up with new ways at looking at PAYE and improving the PAYE system for employers.
These are early days, however, in planning the next stages in the modernisation of the tax administration.
Detailed proposals have yet to be developed and presented to the Government for consideration.
Before any changes are made, there will, of course, be a lot of consultation with affected taxpayers, tax advisors, professional bodies and payroll professionals.
Thank you and I wish you a very successful conference.