Keynote Address to NZ Institute of Chartered Accountants (NZICA) 2012 Tax Conference
Michael Fowler Centre,
Wellington Friday 26 October 2012
I am delighted to be here with you again, particularly for your twentieth annual conference.
Over the last twenty years some of the country’s top tax experts have come together at this conference to focus on the big issues of the day.
And there is always something new to occupy us in the world of tax.
Let us not forget that the big tax story twenty years ago was that Budget night 1992 introduced the contentious entertainment tax.
It was an event many of us remember well – and probably still bear the battle scars from!
It was at a time when the process by which the government made tax changes was not nearly as well defined or transparent, and I would not be at all surprised if part of the catalyst for the establishment of your annual conference was the number and scale of tax changes, not to mention the capricious and arbitrary nature of some of them.
But looking back over that period, I would say that the tax landscape has had a sense of continuity about it, across successive governments.
Of course each new government has its own aspirations for the country and the economy and the tax system is a means for achieving that, yet despite that, we have had remarkable stability, and I think that your contribution has been a key part of that.
That continuity and stability in the midst of change is what I want to talk to you about today.
And there is change in the wind, at home and abroad.
New Zealand along with the rest of the world is facing large and important fiscal pressures which we need to respond to in a measured way and without a sense of panic.
It should be done by keeping with our broad-based, low-rate tax settings rather than throwing these away.
We also need to keep our tax system well maintained to manage big external influences as well as the many small remedial matters that need to be considered.
I will return to this theme a little later.
But perhaps the area generating the most change on the immediate horizon and stretching away for some years is Inland Revenue’s business transformation.
Inland Revenue’s business transformation
As you know, Inland Revenue is transforming its business to provide better value for money across the vast range of activities it performs and in line with Government’s expectations for the public service.
Another milestone event twenty years ago for the tax system was the advent of Inland Revenue’s computer system, FIRST.
For its time, FIRST was ground-breaking and it still continues to do good service.
However, it has become increasingly apparent that the system has become a significant challenge to the efficiency and effectiveness of our tax administration.
Since the advent of FIRST, various policy initiatives like Child Support, Student Loans, Working for Families and KiwiSaver, have become part of Inland Revenue’s core business, and inevitably have placed their own pressures on the system.
At the same time, taxpayers, both corporate and personal, have been calling for a more interactive system to enable them to better manage their tax affairs on-line, a little like the way we do our banking these days.
Let me be clear – while FIRST is under pressure, it is likely to remain a core part of Inland Revenue’s architecture for some time to come.
Those, like for example the Parliamentary Opposition, who allege the whole system is in danger of imminent collapse, and that we are doing nothing about it are as irresponsible as they are plain ignorant.
The briefing paper I received after the 2011 election made it clear that it was now timely to consider afresh the future role and function of Inland Revenue, given that its role now extended far beyond that of just a traditional tax collector.
Inland Revenue today is the government agency most New Zealanders have most dealings with, and is responsible for raising around 77% of the government’s revenue.
So, while modern technology is obviously an important part of Inland Revenue’s future, the issues we are considering go far beyond a simple replacement of our current technology.
In order to continue to raise the revenue and disburse benefits in the future, Inland Revenue also needs to examine its business processes alongside its modern role.
The Department will need to have processes that lower compliance costs and make it easy for customers to deal with them, and will also need to be able to work across government.
As it transforms itself, Inland Revenue will have a particular role to play in two of the PM’s ten result areas for the public service by reducing the compliance burden on business and supporting the transition of government services to the digital environment.
None of this can be achieved quickly or easily – as recent information technology experiences demonstrate.
In passing, I find it more pathetic than amusing that our critics can on the one hand berate MSD for allegedly not consulting widely enough in the development of its IT systems, and then in the next breath attack Inland Revenue for its steady and thorough approach, involving the judicious use of consultants from New Zealand and abroad.
My commitment is simple: I want the best outcome, the best system, and the best advice to achieve the best outcome, and I make no apology for that.
More generally, taxpayers, tax professionals, the general public and Ministers need to consider what New Zealand requires of a good tax system.
My view is that Inland Revenue needs a focus on supporting business and to continue to focus on providing value for money.
I would emphasise the focus on “value” as well as “money” because reducing unnecessary contacts with the Department and making them as low cost as is possible for both taxpayers and Inland Revenue, while highly desirable, will also mean moving staff from lower value tasks to higher value tasks.
There are undoubtedly a range of improvements that can be made to Inland Revenue’s processes and systems.
An example would be to improve the PAYE system, with a particular focus on the Employer Monthly Schedule.
This schedule provided to Inland Revenue by all employers is a key payment and data collection mechanism within the overall tax system.
We rely on it for collecting 39% of Government tax revenue and Inland Revenue also relies on it for vital information.
So it performs a hugely important function, yet it is inflexible and cannot accommodate changes.
And I would hazard a guess that many employers view it as an irksome chore.
A fundamental issue with it is that it is labour-intensive, thus making it a significant burden on employers.
To avoid repeat contacts from Inland Revenue and double-handling, we really need a system which allows accurate, validated information from employers at the first interaction providing near real time confirmation and improved status reporting.
Such a system would also enhance information sharing across government, unlocking further efficiencies in the public service.
But I think that what would be most helpful for employers would be if such a system were integrated as part of the employer’s everyday business system – simple, seamless, no fuss or bother.
Having features such as these would mean that employers would reduce the amount of time they spend on PAYE obligations and time spent interacting with IRD.
Over the next few years, it is my expectation that IRD will want significant engagement with practitioners to find the best way to administer the tax system.
It is an exciting time for the department and the tax community and will be your opportunity to influence the shape of the organisation and indeed of the whole of government for generations to come.
I encourage you to take up that challenge, and to become involved with us in the process of change.
Now all of that is a big change programme for Inland Revenue.
Over the next few months, the Government will be considering all these issues and making a series of major decisions.
They will be big and far-reaching, but the challenge will be for Inland Revenue to be able to pull this off while still performing the core tasks required of it and delivering the Government’s tax policy work programme.
Those who seek a silver bullet, single bold solution will be as disappointed as they are out of touch.
We are talking about the face of Inland Revenue, and beyond that the wider face of government integration with its citizens, for probably the next 20 years or so.
This transformation will be thorough, staged, and wide-ranging, and will ensure at the same time that Inland Revenue will continue to be able to carry out its core functions in a way the New Zealand public would expect.
That is the continuity in the face of change that I was referring to.
Important ongoing functions that I, as Revenue Minister require of Inland Revenue are the development and implementation of the tax policy work programme and the annual Budget.
Officials are turning their minds to Budget 2013 proposals at the moment and their thinking is set firmly in the context of the need for careful fiscal management.
Twenty years ago, New Zealand had reached an unenviable achievement.
New Zealand’s net government debt had risen steadily from the early 1970s and in 1992 peaked at over 50 per cent of GDP.
It then took another 16 years of near continuous economic growth and careful fiscal management to get it down and almost eliminate it by 2008.
We all know what happened next.
The twin body blows of the Global Financial Crisis and the Christchurch earthquakes have been a setback, but the Government has been working strenuously to wrestle that debt back under control.
If there is one thing that the Global Financial Crisis has taught us, it is that we urgently need to protect our economy from overseas economic turmoil.
To assist with returning to surplus, we need to maintain robust taxes in order to raise the revenue we need to fund Government services and functions.
But we will do it in ways that are as fair and efficient as possible and that means that we apply existing tax bases more broadly to reduce distortions to investment and increase fairness so that the tax burden is spread more evenly.
This year’s Budget tax announcements inspired some to accuse the Government of scraping the bottom of the barrel, casting around desperately for any dollar we could.
While that is a colourful description, it is simply missing the point entirely.
If the objective was to raise as much revenue as possible, we could do that very easily by raising rates or imposing new taxes, whereas the Budget decisions were about tidying up the system and removing outdated some tax credits.
Even as we speak, some EU countries are lining up to support the introduction of a financial transactions tax, and there is a sad but predictable chorus here calling for similar moves.
That is not the road for New Zealand.
Nor is the path of higher personal taxes and capital gains taxes.
Taxes that were dumb to introduce in the past are likely to still be dumb to introduce in the future.
We are not in the business of rushing about applying quick-fix measures every time a new crisis arises.
What we are doing is ensuring careful management of the Government’s finances and the tax system.
I am not making Budget announcements today – we are not yet at that point, but I can tell you that in line with successive Budgets and recent tax changes we will continue to make the system fairer and more efficient.
I have encouraged officials to continue seeking out further improvements to the system and any changes proposed will in due course be consulted on in accordance with the Generic Tax Policy Process.
It is also an important part of business transformation – modernising the various taxes we impose sits very comfortably alongside modernising the way we do our business, and so it should.
The Government cannot design tax changes in isolation and I believe the Generic Tax Policy Process has been hugely influential in raising the quality of tax policy reforms in New Zealand.
Since its inception, which followed some of the dark days that I spoke of earlier, tax officials and tax practitioners have been building a strong working relationship which, it seems to me, has been highly beneficial for New Zealand, producing tax policy all the better for the consultation between officials and practitioners.
There will of course always be differences of opinion on policy proposals, such as the matter of retrospectivity.
Let me first assure you that in developing policy, retrospective application dates are not the norm.
Instead, the Government can propose tax law changes that apply for example, from the date of announcement in limited circumstances when:
- A significant risk to the tax base exists, or when
- The coherence of the tax legislation requires it, for example, fixing an obvious error or clearly unintended gap.
These exceptions are recognised under the generic tax policy process.
At the same time, I completely accept that these circumstances must be balanced against the need for business certainty.
The way forward from this point for policy development is consultation in order to test out proposals and adjust where necessary based on feedback.
As a result of consultation, details of the original proposals are often changed.
A good example of this is the proposed tax treatment of assets used both privately and for earning income.
Mixed use assets
The central issue with mixed-use assets is one of apportionment and how to treat the time when an asset lies idle and theoretically available for private or business use.
It has always been the case that assets used privately do not qualify for a tax deduction, while those used in earning income can be eligible for a deduction.
That is a principle of our tax system.
Presently the general apportionment proposition for a mixed use asset is that the asset was acquired primarily for business purposes, so non-use is business use and therefore deductible.
This seemed unfair and a proposed solution considered by officials was to treat non-use as private.
However after policy development and consultation, Government has decided that the apportionment should be based on a comparison of private use to business use.
In other words, the Government has chosen a reasonably generous approach.
A trade-off for this more generous approach is that the proposed rules are more complex.
A complicating factor arises when the property is held in a company as companies are generally allowed an automatic tax deduction for interest expenditure.
As a result the bill proposes rules that apportion company interest deductions potentially across both companies and their shareholders, which adds a level of complexity.
The new rules have been included in the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill which is currently before the House.
If you choose to make submissions on the proposed rules, I urge you to do so as the bill goes through the select committee process.
Meanwhile, change is also occurring beyond our borders which we need to contend with.
You may be aware of the US requirements arising out of the Foreign Account Tax Compliance Act.
To combat tax evasion, the Act (known as FATCA) requires financial institutions internationally to provide details relating to US citizens’ accounts to the IRS.
That is fine for the United States, but FATCA’s waves wash widely, and could have profound implications for a number of New Zealand financial institutions.
So to reduce the compliance cost for New Zealand financial institutions, the Government will seek to negotiate an Inter-Governmental Agreement with the US.
This would see our financial institutions providing the information to Inland Revenue which would exchange the information with the IRS.
This also removes risks around financial institutions being in breach of domestic law.
At the same time there has been important work to ensure that the tax system is maintained and that tax settings work well for New Zealand with its highly mobile labour force and capital stock which brings me to the issue of mutual recognition of imputation and franking credits with Australia.
Mutual recognition has been an issue for quite some time and is one of the issues currently being examined by the Productivity Commissions of Australia and New Zealand.
The Productivity Commissions have noted that the absence of mutual recognition was of great concern to a number of business participants but that the matter required further assessment.
Consequently, the Productivity Commissions are examining mutual recognition further ahead of the release of their final report, which is due to be submitted to respective Governments by 1 December 2012.
Tax officials have been closely engaged with that process and the Government remains committed to pursuing mutual recognition.
Rewrite Advisory Panel
There is one other significant item that I would like to mention about consultation.
We often focus on “big splash” tax reforms.
But a good tax system also needs on-going systematic maintenance, and tax bills introduced into the House routinely carry a large proportion of small remedial items.
Consultation on these items tends to be narrower than for the big splash items.
Because of their importance to the health of the system, I have asked the Chair of the Rewrite Advisory Panel to take remedial items into their ambit as a cohesive body of work and to act as an additional consultative body.
The panel will provide consultation to Inland Revenue on remedial matters on the tax policy work programme under a process consistent with the generic tax policy process.
It will assist with identifying and setting the priority of remedial items and provide input into policy analysis and recommendations.
There are major benefits to be gained for the tax system through this approach.
I said at the outset that much has changed over the last twenty years.
On the whole those changes have been for the good.
Our system is more robust, and the quality of our policy-making is better.
But change is never static.
If what we did after 1992 was radical by the standards of what had gone before, the changes we are now contemplating are even more dramatic.
Inland Revenue is preparing to embark on a profound programme of change that will create challenges but also opportunities for an improved tax system over the next ten years.
But in the face of all this change, we cannot stand still.
We need to make sure that the tax system provides a fair, efficient and robust base for raising the revenue the Government needs to finance its spending and keep debt under control.
I hope that the good working relationship forged between your organisation and the IRD will help both organisations drive big improvements to the tax system through this period.
Once again, I thank you for the important contribution you make by taking part in the consultative process.
I wish you a very successful conference.
Mark Stewart | Press Secretary | Office of Hon Peter Dunne
DDI +64 4 817 6985 | Mb +64 21 243 6985