Hon Bill English
Minister of Finance
Hon Peter Dunne
Minister of Revenue
Fairness, integrity and growth – tax work programme outlined
The Government’s updated tax policy work programme will support steps taken in Budget 2010 to rebalance New Zealand’s economy and strengthen growth, Finance Minister Bill English and Revenue Minister Peter Dunne said today.
“We want a tax system that tilts the economy towards work, investment and savings and away from the unsustainable borrowing, consumption and over investment in housing of the past decade,” Mr English said.
“The Government's 1 October tax changes took important steps in this direction and the tax policy work programme we are announcing today is designed to support this.”
The Government’s tax policy work programme is set by the Ministers of Finance and Revenue and released annually.
Releasing details of the work programme in a speech today to the New Zealand Institute of Chartered Accountants, Mr Dunne said tax policy had an important role to play in supporting a return to strong economic growth.
Mr Dunne also emphasised a continued tight grip on Government spending and prudent investment as measures that were positive for the economy.
The key components of the updated tax policy work programme are:
- continuing the delivery of Budget 2010 initiatives;
- the international tax review that continues reform in this area and the negotiation of tax treaties and tax information exchange agreements;
- supporting the Savings Working Group, including providing advice on recommendations and thinking broadly about the future in this area; and
- Transform IR, a project which will shape the way Inland Revenue and the tax administration system operates in terms of areas like tax secrecy, collection of debt and general governance.
“These four areas are central to the Government’s plan for lifting economic performance,” said Mr Dunne.
“Some of the key pieces of work under way include the review of depreciation fit-out, an improved disputes process, a review of the child support system, the integrity of social assistance programmes and flow-through income tax treatment for closely held companies.”
“In addition, some base maintenance work, such as profit distribution plans and the valuation of livestock has been included.”
The valuation of livestock project will review the ability to move from one livestock valuation method to another - such as for sheep, beef and dairy cattle. The project will consider the effectiveness of the rules that are designed to prevent movement between the valuation regimes and, in particular, whether it is too easy to leave the herd scheme.
“Officials will be providing briefings as appropriate and consulting on this in the coming months,” concluded Mr Dunne.
The text of Mr Dunne’s speech as well as the schedule are available at: www.taxpolicy.ird.govt.nz.
Ministerial Advisor to Hon Peter Dunne
Minister of Revenue | Associate Minister of Health | MP for Ohariu | UnitedFuture Leader
Tel: DDI 04 8176991 | Mobile: 021 917339
Keynote address to the 2010 NZICA Tax Conference
Auckland, Friday 29 October
I am very pleased to have been invited again to open this conference today, and, as is now customary, would like to take the opportunity to share with you details of the mid-term update of the tax policy work programme.
Essentially, as we all know, taxes are required to finance government spending, and tax policy aims to ensure that taxes are raised as fairly and efficiently as possible while maintaining the integrity of the tax system.
This is critical if New Zealand is to have a world class tax system and a strong economy.
As we move out of recession, the Government’s priority is to restore our fiscal position from deficit to surplus, making it crucial that the tax programme be revenue neutral to positive.
This involves managing the growth in expenditure, eliminating waste and improving the efficiency of government spending, as well as maintaining the revenue base.
Tax policy, which can have substantial and wide-ranging effects on the economy, also has an important role to play in supporting a return to strong economic growth – especially by reducing the distortionary effects of taxation.
Its focus must be to enhance productivity and growth and to encourage people to save in ways which provide the best returns to New Zealand as a whole.
The work programme must also protect the integrity of the tax system, while advancing the key economic drivers that Cabinet has decided for all of Government.
So, the four key elements of the work programme therefore are:
- continuing the delivery of Budget 2010 initiatives;
- the international tax review that continues the previous reform in the area and the negotiation of tax treaties and tax information exchange agreements;
- supporting the Savings Working Group which will involve providing advice on recommendations and thinking broadly about the future in this area; and
- the ongoing development of the Transform IR project that has ramifications for the way that Inland Revenue runs its operations and the way that the tax administration system operates in terms of things like tax secrecy, collection of debt and general governance.
Let me start with the Budget.
Budget 2010, as you know, introduced the most comprehensive overhaul of the tax system since the 1980s.
And although the Budget was delivered in May, post-Budget work still remains, though much of it will have been completed by the end of the year.
The tax switch of the cut in personal taxes and the rise in the GST rate was arguably the most critical point.
Overall, that has been successfully implemented and I want to take this opportunity to thank the Institute for assisting with this.
In particular, I am aware of the significant education exercise that was undertaken by the Institute and its members through road shows and other forms of public communication.
I would also like to thank the GST Advisory Panel and officials who supported the Panel for their work in addressing particular issues that came to their attention after Budget Night.
Owing to the Panel’s considerable efforts, the further transitional measures that were recently implemented were well targeted and appropriate in the specific circumstances to which they apply.
What became clear to us as the process of change unfolded was that because of changes in business technology, the relevance of retained experiences from the last GST rate change in 1989 was not as important as we might otherwise have imagined it to be.
And it is also worth remembering that we did things a little differently from 1989.
For example, unlike then, we ensured full compensation was available, both in the form of generous personal tax cuts, and an immediate adjustment in all Government benefit payments, including New Zealand Superannuation and Government Superannuation occurred at the same time.
No such compensations formed part of the 1989 package, which was implemented in six weeks – not four months as was the case this time – and without the assistance of an expert advisory group, like the GST Advisory Panel.
By and large, notwithstanding the potential disruptive effect of the Canterbury earthquake, and the controversy that blew up over the approach adopted by some utility companies, the 1 October date passed smoothly, and I want to acknowledge the co-operation of all sectors of the business, legal and accounting companies in enabling this to happen.
Social assistance integrity
The way in which entitlements to Working for Families, student allowances and community services cards operate will always be of concern to society and the Government.
These schemes are intended to help lower and middle-income families, and there is little argument with that.
However, problems always emerge at the boundaries, or in a few cases where people blatantly try to rip-off the system by hiding income one way or another, or simply misrepresenting what they earn.
Our problems in this area were exacerbated by the incoherent 39 per cent tax rate introduced by the last Labour government.
This encouraged a lot of small businesses to reorganise their affairs and as a consequence, they became aware of the social benefit advantages that they could also derive from these structures.
Inevitably, other people hear about these situations, and so question the fairness of the programmes, which simply detracts from their overall credibility, which in turn can lead Governments to pare them back, and thus unwittingly diminish the value of what they were seeking to do at the time the programmes were established.
The blunt point is that people should not be able to receive more social assistance simply because of how they structure their affairs or receive their income, and that our collective tolerance for those who try to do so should be zero.
We signalled in the Budget that the Government would be cracking down in this area, because the abuse by a few is simply unfair to the many.
An official’s issues paper was released for comment and suggested broadening the definition of family scheme income, which is used to determine entitlements to Working for Families tax credits and other programmes, and using this broader definition for the student allowance parental income test, and for some community services cardholders.
Some submissions questioned whether the cost of implementing the proposals would outweigh any fiscal savings.
Overall the savings are expected to exceed costs but more importantly the aim of these proposals is to enhance the integrity of the programmes rather than simply save government spending on assistance.
The broader scope of the definition would include income from trusts, some fringe benefits, some passive income of children (especially where such income is clearly way out of line with the earning capacity of the child at that stage or life, or even out of step with the apparent earning capacity of their household), and income of non-resident spouses.
Changes to the definition of family scheme income for Working for Families tax credit applications and all new applications for the community services card would apply from 1 April 2011.
The Government has accepted those proposals and legislation to give effect to them should be enacted before the end of the year.
The new definitions could also apply to all new applications for student allowances from 1 January 2012.
The Government is introducing new rules from 1 April 2011, providing flow-through income tax treatment for closely-held companies who choose to use them.
The new rules will allow a business to still have the benefits of a company, such as limited liability, but will mean that business income and losses will be passed to shareholders who will pay any tax due.
In response to feedback from small business, we have also decided to review the tax rules for dividends, with a view to simplifying them for closely held companies.
In the interim, existing qualifying companies and LAQCs will be able to continue to use the current qualifying company rules, but without the ability to attribute losses.
Draft legislation for these changes has been prepared and circulated for comment.
That allows existing qualifying companies and LAQCs to transition into the new flow-through rules, or change to another business vehicle such as a limited partnership, without a tax cost.
The final legislation for the new rules will be introduced in late November and I expect it to be enacted before the end of this year.
Depreciation - fit-out review
As you will be aware, this year’s Budget removed depreciation on most buildings - starting from the next income year.
This was on the basis of data suggesting that most buildings, on average, were not in fact depreciating, and the additional revenue it will produce will help pay for the tax cuts.
However, in removing depreciation from buildings we acknowledged it was imperative to provide clarity regarding the depreciation treatment of items that were attached to commercial and industrial buildings – such as fit-out.
The intention has always been that owners of commercial and industrial buildings should continue to depreciate their building fit-out in the same way as they are doing now.
Since Budget 2010 officials have been working on proposals to achieve this.
An issues paper was released suggesting how the boundary could be clarified and we received a number of useful submissions.
As a result of this process the Government has agreed to amend the proposal in certain areas to better reflect existing practice and allow greater access to the rules that provide transitional relief.
The proposal will be legislated for later this year.
GST – Phoenix schemes
The August 2010 tax bill contains a wide range of largely remedial and/or technical measures mostly relating to improvements to the GST system.
The Government is tackling GST fraud in the property area as a matter of priority as this issue has been an ongoing one not just for New Zealand, but for the vast number of countries that have a GST or VAT system.
The bill is reaching its final stages of the Select Committee process and is expected to be reported back to the House in the next few weeks.
International tax reform
It is critical that the tax system does not stand in the way of businesses growing and thriving in New Zealand and beyond. And it is also important that New Zealand continues to be a good place to invest in and a more attractive place to base multi-national enterprises.
Therefore we need to continue our focus on ensuring that our tax rules are internationally competitive and our rules on the taxation of offshore investment are in line with international norms.
The Taxation (International Investment and Remedial Matters) Bill which will have its first reading next month, provides consistency of tax treatment between similar types of foreign investment by extending the active income exemption and active business test (with some small modifications) to non-portfolio foreign investment funds (FIFs).
It also extends and rationalises the portfolio FIF reforms so that those investors who are unable to use the active income exemption (due to having an insufficient shareholding or access to information) will generally be taxed on an assumed 5% rate of return (fair dividend rate method).
The main exception to these rules is for foreign companies that are located in Australia.
Investors in these companies will not need to attribute income under the rules.
The Government also intends to make New Zealand a more attractive place to invest in by lowering withholding taxes through double tax agreements.
As you may know, the negotiation of tax treaties (otherwise known as double tax agreements, or DTAs) has had significant importance on the tax policy work programme for some time.
For the last two years, our focus has been on securing lower withholding tax rates on dividends and royalties in our existing DTAs with key trading and investment partners.
We have also been updating our information exchange Article to reflect the broader scope of that Article in the new OECD model.
A new DTA with Australia entered into force earlier this year as did one with Singapore.
Meanwhile a Protocol that amends our DTA with United States has been approved and awaits ratification.
We are currently negotiating with Canada and the UK.
At the same time, as appropriate, we continue to extend our existing treaty network.
Accordingly, we have signed a new DTA with Turkey this year, and negotiations with Hong Kong have begun.
The economic case for a DTA with Hong Kong, one of the main financial and trading centres of Asia-Pacific, is obvious.
Until recently, Hong Kong would not enter into exchange of information arrangements acceptable to us and other OECD countries.
However, that has now changed and Hong Kong is certainly a priority for us, as it is now for many other countries.
Inland Revenue’s DTA negotiation team has therefore never been busier.
Yet, the question has been raised on a number of occasions recently whether New Zealand should make a greater effort to increase the size of its DTA network.
This is an interesting question.
New Zealand’s network of DTAs currently stands at 35 DTAs in force.
This is comparable with Australia’s network of 43 DTAs.
Other countries appear to have different ideas about the ideal size of a DTA network.
Some like Canada and the United Kingdom have very large networks – in the vicinity of 100 or more.
Others, however, like Japan and the United States, have relatively modest sized networks (both with 50-odd agreements).
Compared with these countries, the size of New Zealand’s network seems to be respectable.
From a strategic perspective, we also need to be clear about our reasons for entering into DTAs.
DTAs do not come without cost: they give up revenue; they lock in certain positions and affect our ability to change tax policy; they are subject to the vagaries of interpretation; and they need to be maintained.
Accordingly, DTAs should only be entered into when there are clear indications they are likely to be meaningful to New Zealand.
Generally speaking, DTAs will only be meaningful if they are with countries with a significant economic relationship (either current or proposed), or if there are real issues of double taxation at stake or they are substantial economies with advanced tax systems and information exchange and other co-operation will be useful.
Nevertheless, no simple rules are possible and there are often broader reasons why a DTA with a country is in New Zealand’s best interests.
We will prioritise our DTA programme on the basis of the above costs and benefits.
Our currently policy is to have a DTA network more in line with that of Australia, Japan and the United States than the wider network of Canada and the United Kingdom.
Savings Working Group
Working groups are useful ways for government to connect directly with the people who can provide insight and experience.
The Tax Working Group was highly successful and their recommendations valuable, in my view.
Another working group recently established is the Savings Working Group, to address the critical issue of national savings.
New Zealand has had persistent current account deficits and has an internationally high level of net international indebtedness, both of which. potentially make us more vulnerable to external shocks, such as the recent financial crisis.
Lower income tax rates and an increase in the goods and services tax (GST) rate, announced in Budget 2010, were deliberate moves to tip the economy towards saving, but more needs to be done.
The Savings Working Group's scope includes:
- The role of Government savings as part of New Zealand's overall savings picture, including long-term savings/debt targets and the interaction of government and private savings.
- The impact of the tax system on the level and composition of national savings and investment decisions.
- The role of KiwiSaver in improving national savings.
Taxation affects national savings directly as part of government revenues and indirectly, due to its effect on the incentive to work and save of individuals and households.
The examination of the impact of the tax system on savings will be far-ranging, including such fundamental questions of whether the tax system should be indexed for inflation or whether a dual income system, also known as the Nordic system should be introduced.
A Nordic tax system levies a lower tax rate on capital income relative to income from labour, (including entrepreneurial labour).
In addition to their impact on national savings, these and other options will be examined according to standard tax policy criteria of:
- impact on government revenues;
- fairness; and
It must also be recognised that international evidence suggests that taxation alone does not seem to have a significant impact on the level of savings.
However, taxation can have an impact on the source of those savings and where they are invested if different forms of savings are taxed differently.
I said before that we have seen the biggest overhaul of the tax system in some years.
Along with the tax system, the tax administration system itself is also being examined with a view to shaping a tax administration meeting society’s needs in the future.
Electronic communication and a greater use of the internet look set to play a larger role in tax administration.
Already we are seeing the first steps in this direction with proposals for greater self-management of one’s affairs online for student loan borrowers.
For businesses, considerable efficiency gains can be reaped from such an approach.
Considering that people already use accountants for managing their tax affairs and tax refund agents to get tax refunds, the Making Tax Easier consultation proposed to move towards a model where businesses’ accounting software sends the relevant tax information on routine tax matters – PAYE, GST and so on through to Inland Revenue.
This approach can bring significant advantages to business and has been chosen for two reasons, which are related.
First, businesses already have the information Inland Revenue needs in their accounting systems.
Enabling business accounting software to deal with tax compliance functions eliminates the time cost to businesses in transcribing information from one system to another.
Second, in order to move away from its paper-based systems, which struggle to deliver the levels of service and access to information people expect in the modern age, Inland Revenue needs to receive information electronically.
This is a system which has been around since time immemorial, and many are comfortable with it.
Providing a facility for their existing accounting system to take care of routine tax for them will give them the chance to weigh up the advantages of moving off paper and into an electronic system.
Of course, there will be some who will say, quite fairly, that they are just as happy using the paper forms.
Compared with that, packaging basic tax compliance into existing accounting packages will result in far greater uptake.
A Software Developers’ Working group has already been established to look into issues and options to allow businesses to connect directly to Inland Revenue’s systems.
A summary of the group’s discussions will be made public on Inland Revenue’s website in due course.
Complex calculations will of course, continue to be the preserve of tax professionals who are required to exercise judgment and apply complex rules which cannot be built into an accounting system.
What I have been discussing so far are the key initiatives considered crucial by the Government for advancing its economic objectives.
No less important for a better, fairer tax system are the initiatives which are of administrative function.
Delivering a better and fairer tax system is not just a matter of getting broad tax policy settings right.
The tax system must also meet society’s view as to what is fair and in this regard, a number of initiatives are in train.
Child Support Review
September saw the release of a Government discussion document and on-line forum about making wide-ranging improvements to New Zealand’s child support system.
The “Supporting Children” document has proposed the biggest shake-up of child support since its introduction nearly 20 years ago.
The level of interest in the issues raised in the document has been enormous with approximately 1600 submissions received to date.
Clearly the use of on-line consultation has proved highly successful and I expect this to be an ongoing feature of tax and social policy development when needed to reach a wider audience.
More importantly, the number of submissions received undoubtedly reflects the high degree of interest in making the child support system fairer from both parents’ perspective.
Based on the views expressed in submissions, I expect to be recommending significant improvements to the system in the interests of the children that the system is there to protect.
As I have said on a number of occasions, the child support scheme needs to keep pace with a changing society where it is more common for both parents to work and share the care of their children.
It is important that these societal changes be taken into account in the child support formula since a fairer outcome for participants in the scheme is likely to lead to greater compliance.
The discussion document also sets out a range of other options for improving compliance such as the compulsory deduction of child support from salary and wages and improvements to the child support penalties system.
I am expecting officials to report back to me on submissions shortly with a view to the introduction of legislative change around the middle of next year.
I am of course aware that for some time now, NZICA and the New Zealand Law Society have been working closely with Inland Revenue on a range of concerns with the dispute resolution process.
It is satisfying that resolution has been reached on some key matters relating to the administration of the process such as the introduction of facilitators to conferences between the Commissioner and the taxpayer and advice about agreeing to opt-out of the full process.
A number of legislative changes to the process sought by the two organisations will be included in the forthcoming November bill leading to even greater improvement.
I do understand that the measures in that bill will not contain all the changes that taxpayers would like to see – such as a taxpayer unilateral opt-out and statutory timeframes.
This is because I am expecting the significant administrative changes to largely address these concerns.
I have, however, asked that the operational changes be reviewed in two years time and am open to considering further legislative change at that time should significant taxpayer concerns remain.
In the meantime, I encourage the Institute and its members and the New Zealand Law Society to continue the dialogue with Inland Revenue about the disputes process.
Earlier this year I announced the Government’s intention to remove gift duty if concerns regarding creditor protection and social assistance targeting could be addressed.
Since my announcement there has been considerable work done by officials across government to assess these concerns.
In many senses gift duty is an anachronism – it has been around since 1885 – costing about $70 million in annual compliance costs, while raising just over $1.5 million a year.
The officials’ review has made good progress and I intend to announce the outcome of this work shortly.
Income Sharing Tax Credit Bill
The confidence and supply agreement between National and UnitedFuture included supporting legislation to the first reading stage to allow couples. raising dependent children the option of income sharing for tax purposes.
This bill was introduced last month and is now being considered by the finance and expenditure committee.
The closing date for public submissions has been extended to 10 December.
The tax credit will effectively refund some of the tax paid by couples caring for children where one partner is on a higher tax rate than the other.
It will mean that different couples on the same level of combined income will effectively pay the same combined amount of personal income tax, regardless of how much each partner earns.
The changes proposed in the bill will also mean some couples have greater choices to work fewer or more flexible hours of paid work in order to care for children, by increasing their combined after-tax income.
Eligible couples with dependent children will be able to apply for the tax credit, if they want, at the end of each tax year.
The amount they receive will depend on the relative amounts of tax payable by each partner on their individual income.
If the legislation is enacted, income sharing for eligible households will be available from 1 April 2012.
Use-of-money interest deductibility
For some time there has been a question whether use-of-money interest is deductible.
The Taxation (Tax Administration and Remedial Matters) Bill will contain an amendment clarifying that it is deductible.
The amendment will ensure consistency between companies, for whom this interest is always deductible, and individuals.
The outcome is that use-of-money interest will be both assessable and deductible.
The amendment will apply retrospectively – to the start of the use-of-money interest rules if taxpayers have already claimed deductions.
In addition to these initiatives, work on base maintenance integrity and projects to improve the fairness of the tax system will continue.
Profit distribution plans (PDPs)
The Government announced on 16 April 2009 that it intended to clarify the law to ensure that bonus issues of shares distributed under PDPs are taxed in the same way as shares issued under other dividend reinvestment plans.
Such legislation is likely to be introduced in mid-2011.
Valuation of livestock
The Minister of Finance and I have asked officials to review the livestock valuation elections.
We are concerned at the opportunity for sheep, beef and dairy farmers to exploit the system as it appears that it is too easy to leave the herd scheme.
Care and management
And finally, the Commissioner of Inland Revenue will, I believe, discuss later at this conference, the recently released Interpretation Statement on Care and Management which I appreciate is of interest to you.
The work programme I have announced today is comprehensive and ambitious and will move us forward in building a world leading tax system, while ensuring that the existing system continues to deliver what Government and society expects.
It builds on what has already been a momentous year in tax reform, which has included:
- the introduction of payroll giving
- the Budget 2010 tax changes
- the introduction of the Income Sharing Tax Credit Bill
- the Child Support Review
- the revamp of the student loans scheme
- the Transform IR project
- the review of gift duty
As both Minister of Revenue and Leader of UnitedFuture I look forward to overseeing the implementation of this programme, and to our ongoing dialogue on future tax reforms.
I also wish you all the best for a successful conference.