Speech to 15th Annual Employers and Manufacturers Association Payroll Conference
Rendezvous Hotel, Auckland
Good morning and thank you very much for inviting me to be with you again today.
I always enjoy coming to speak to you.
At the heart of every economy is the crucial business of people receiving their pay correctly and on time, allowing them to plan how they spend, save or invest.
And as you are the people who make this happen, Payroll, in many respects, is the engine room of the economy.
Let me put that into perspective.
Government services and functions include police, social welfare, conservation programmes and so on as well as building and maintaining roads, hospitals and schools.
And it is your tax dollars and mine that pay for all this.
Of the roughly $60 billion total tax collected each year, around $21 billion comes from PAYE alone.
So thank you for your work on behalf of all New Zealanders.
For the Government, it is a huge responsibility to ensure that the money that Kiwis pay in taxes is spent wisely and that changes to the tax system will not damage other parts of the system or overly disadvantage anyone.
Earlier this month I announced details of the Government’s tax policy work programme which sets the tax system's direction and objectives for the next eighteen months.
It contains carefully devised plans supporting the Government’s aspirations for New Zealand, including;
- responsibly managing the Government’s finances and tax system [coherence/integrity]
- building a more competitive and productive economy
- delivering better public services, and
- rebuilding Canterbury
Clearly the private sector has an interest in this so in developing the tax policy work programme, private sector representative groups are consulted.
This consultation is crucial as the work programme will affect a wide range of aspects of the tax system and its administration.
That is why we have what is called the Generic Tax Policy Process.
Since 1994, tax policy has been developed using the Generic Tax Policy Process (GTPP).
This is a very open and interactive process which helps ensure that tax policy changes are well thought through.
The GTPP was introduced to ensure better, more effective tax policy development through early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives.
I believe that the GTPP is a good process which has produced a sound tax policy work programme for 2012/13.
Amongst a range of initiatives intended to improve efficiency and fairness, the work programme includes proposals first announced as part of Budget 2011 to review taxation in certain situations to ensure fairness.
One of those that I would like to discuss, focuses on people who, depending on how they are remunerated, are not taxed equally and/or receive differing entitlements to social assistance programmes.
In the interests of a fairer and more economically efficient tax system a question we had to ask ourselves is whether the tax rules should include untaxed benefits that are substitutes for salary, particularly when a salary trade-off is involved.
Furthermore, in a number of instances those benefits, and fringe benefits more generally, are often not included in the definition of income for social assistance purposes (such as entitlement to Working for Families).
This is unfair to people in genuine need and to the taxpaying public which foots the bill for these assistance programmes.
Budget 2010 broadened the definition of income for social assistance purposes to provide a better measure of family income.
This included attributed fringe benefits provided to shareholder-employees who control a closely held company, with the question being left open at that time as to whether more non-cash benefit situations should be included at a later date.
An officials’ issues paper is being prepared, providing some suggestions in these areas.
I anticipate the paper being released before the middle of this year and will be available on Inland Revenue’s tax policy website.
As important contributors to the efficient working of the tax system, I invite you to study the suggestions in that document and make a submission.
Your views are very important.
As Minister of Revenue, your participation as part of the GTPP gives me the confidence that tax proposals which have been consulted on are workable and practical and will add to the fairness and efficiency of the tax system.
Of course any discussion of efficiency of the tax system and the tax administration must also include mention of the systems used by Inland Revenue.
Inland Revenue’s business transformation
Inland Revenue’s technology systems are ageing and our ability to implement complex or major policy change is declining over time.
In the last few years it has become increasingly apparent that a system designed well before the advent of the internet and e-services has become a significant challenge to the efficiency of our tax administration.
Inland Revenue’s FIRST system, originally intended solely for the administration of tax, has seen its role expand to include the administration of a great many non-tax programmes such as student loans, Child Support and KiwiSaver.
This has resulted in greater systems complexity, loss of agility and efficiency, and increased administration costs.
Clearly, steps have to be taken to continue to ensure the efficient operation of our tax system into the future.
Work in this area is currently being progressed as a key priority with an expectation of a fuller understanding of its scope by mid-year.
The economic and fiscal position calls for a tax system that is as efficient as possible in raising the revenue the Government needs to meet its funding requirements, and flexible enough to accommodate future changes.
Public service efficiency
An important part of getting the Government books back into surplus is the Government itself working more efficiently so as to reduce the burden on taxpayers.
Government agencies are being encouraged to eliminate waste and find new ways to work more efficiently meaning lower administration costs and lower compliance costs.
After the earthquake of 22 February 2011, and with many public buildings inaccessible, government agencies rolled up their sleeves and did what had to be done.
So for example, we found courts being convened on marae and different agencies, like Work & Income and Inland Revenue working together to provide frontline services to those in need.
That spirit of the public service working more cohesively together is to be encouraged.
And on the policy front, steps are being taken to do just that.
The Taxation (Tax Administration and Remedial Matters) Act passed last year for example, provides for greater sharing of information held by Inland Revenue with other government agencies, subject to a range of restrictions.
It makes little sense that a person dealing with a number of different agencies has to provide the same information to each agency.
Sharing information is therefore a rational and efficient way for the public to interact with the public service and especially in Christchurch, anything which facilitates government service delivery is a good thing.
And just on the earthquakes, may I say how gratified I have been at the generous response from people across New Zealand.
Looking at the statistics for Payroll Giving alone, you can see that in March, following the earthquake, we went from 379 employers offering the scheme to 553.
The amounts donated leapt from 160 thousand in February to an astronomical 556 thousand dollars in March.
You may be interested to hear that a recent report has placed New Zealand in second place behind the US for charitable donations.
That is astonishing!
We have always known New Zealand was a big-hearted country but I am still very impressed by this fact.
And the numbers are still growing, so congratulations and my grateful thanks to all of you offering Payroll Giving in your workplaces.
If you are considering offering the scheme in your workplace, I recommend you have a look at the Payroll Giving Early Adopters website at payrollgivinginfo.org.nz
The Payroll Giving Early Adopters Group which comprises a mix of small and large employers has worked very hard to make Payroll Giving more accessible for other employers.
One of the most useful things for employers contemplating offering the scheme is to be able to learn from the experiences of other employers just like themselves.
The site provides useful insights and learnings from employers who have successfully established payroll giving schemes.
Payroll Giving is currently offered by over 1,300 employers with around 107,000 employees having access to a scheme.
Payroll Giving seems to be gaining favour as a convenient way to donate and over $5 million has now been donated through the scheme.
I appreciate that Payroll Giving can mean something extra that people working in payroll are asked to do.
I hope I have shown that it is all part of the greater good.
Similarly other changes to tax laws may mean further work for you, but the result for the nation is great.
Take KiwiSaver for instance.
A range of changes were made to KiwiSaver as part of Budget 2011 and in fact, one of the changes, relating to ESCT comes into effect next month.
I do not mean to go over all those changes, but would like to talk to you about the context and the thinking that has gone into the changes and how this is helping our economy.
A problem that we as a nation face is that we just do not save enough.
We need savings to ensure that we all are secure financially in the event of another financial crisis.
We also need savings so that businesses in New Zealand have adequate supplies of capital to draw on for business development and expansion in order to get to the point where we are exporting more than we import.
So it is this expansion which will help us put the recession behind us.
We all know that KiwiSaver has been very effective in attracting new members, but it has done so at a high cost to taxpayers, with the scheme costing the Government over $1 billion a year in subsidies and tax breaks.
To put it plainly, it is not really saving if the Government is borrowing from overseas with one hand to put into an individual’s account with the other because it simply amounts to all taxpayers bearing a greater tax burden to cover the cost of the borrowing.
So reducing Government contributions and increasing private contributions to KiwiSaver will also lift national savings.
It is calculated that these changes to KiwiSaver will save taxpayers $2.6 billion over four years and help lift national savings.
KiwiSaver is good, but to be truly valuable, its future lies in a larger share of contributions coming from members and employers, and Government providing a lower share, but better targeted incentives.
I should also remind you that at the time these changes were introduced in Budget 2011, other changes were also announced, due to come into effect from 1 April 2013:
- The minimum employee contribution rate will rise from 2 % to 3 %.
- Compulsory employer contributions will also rise from 2 % to 3 %.
The changes to KiwiSaver, will encourage a higher level of private savings, make the scheme more financially sustainable and build a large pool of local capital.
Total funds are projected to rise from $7.9 billion currently, to about $25 billion by 2015, and almost $60 billion in 10 years.
I hope I have given you an insight into the thinking that goes into tax policy decision-making.
You have a role in that decision-making as your work in payroll is a crucial cog in the machine of New Zealand’s economy and I look forward to your participation in consultation.
I note that you have a full and interesting programme – I wish you an enjoyable and fruitful conference.