Hon Todd McClay
Minister of Revenue
8 August 2013
Speech
Opening Address to Fundraising Institute of New Zealand Annual Conference
I’m pleased to be here with you today.
I would like to thank James Austin, CEO of the Fundraising Institute of New Zealand for inviting me to your conference. James tells me that this is an educational conference aiming to impart many of the fundamental pieces of information any charitable organisation will need to succeed. I’m glad to hear it.
The objectives of FINZ according to James, are to grow philanthropy in New Zealand and in so doing, ensure that fundraising is ethical and run as professionally as possible. These are admirable objectives.
I believe that to be really effective in their role and achieving their objectives, not-for-profit organisations may not be businesses in the normal sense, but they need to operate in a business-like manner.
So I urge you to take full advantage of the knowledge and wisdom being shared here today — the work that the not-for-profit sector does goes beyond the immediate recipients of your services and the Government has a direct interest in the sector being as productive as possible.
On behalf of the Government and the people of New Zealand, I would like to thank you for the very good work you do for your communities and for New Zealand. I would like to contribute to that education in a small way by talking about the tax implications for charities because these are quite important for the sector.
I cannot advise you on what forms to fill in or how to manage your tax affairs but I will talk today about the philosophy behind the Government’s tax policies for the not-for-profit sector, how those policies are developed and how the not-for-profit sector can engage in and influence policy formulation. I will also discuss current tax policy work and work coming up in the future relating to the sector.
So how does the Government view the not-for-profit sector? To answer that, perhaps we should first look at what support the Government provides through the tax system.
Support through the tax system
A key way that Government has always supported the sector through the tax system is of course, financially, with:
- Income tax exemptions
- FBT exemptions
- And, of course tax incentives for charitable giving
Subsidising not-for-profit organisations through the tax exemption ensures that those members of society who do not donate to charitable organisations but who nevertheless benefit indirectly from them, contribute through their general tax payments.
These forms of Government support are based on the concept that the services that not-for-profit organisations provide are complementary to the programmes that the Government provides as part of its social objectives, and assist in furthering those objectives. Or to put it plainly — we’re grateful for the work you do and the services you provide and want to see you do well.
A framework for tax policy
In order to help you do well, the Government seeks to develop sound policies for the not-for-profit sector. I said before that not-for-profit organisations need to be business-like. You owe it to the people depending on you and to the people who donate to you. And equally, Government needs to be business-like in its tax treatment of charities.
Tax policies for the not for profit sector fall into two main categories: tax exemptions and tax relief. In developing policies in these categories, and to help ensure your continued work we apply some basic principles to tax policies formulated for the not-for-profit sector. And these are that we aim for simplicity in tax rules so that you know what your obligations are, we aim to maintain the integrity of the tax system in these rules and above all, we strive for fairness.
These principles are all interwoven — allow me to elaborate. Simplicity is a precious commodity in tax law. Because of what it is, tax law becomes horribly complex as the Government tries to ensure that all loopholes are closed off and everyone pays their fair share of tax. At the same time, there are always people who seek to get out of paying tax, so the legislation becomes increasingly complex.
It becomes so complex that people build careers out of understanding and interpreting tax law. Inevitably that results in compliance costs. Compliance costs may be inevitable, excessive compliance costs is something that the Government is opposed to and seeks strenuously to minimise.
The last thing we want to do is to impose excessive compliance costs on the sector. By keeping rules as simple as possible, we reduce compliance costs and people have greater clarity of what their tax obligations are. If you understand your obligations, you’re more likely to comply.
Which leads me to the integrity of the tax system. The tax system is here to serve New Zealanders. The money collected is used to fund all the various government services and functions that New Zealanders expect and require. As we all use those services, we all need to pay our fair share of tax.
The tax system needs to minimise opportunities for tax avoidance and must provide a suitable revenue base for the Government. The Government has improved the integrity of the tax system already through alignment of the top tax rates, reducing the opportunity for people to seek tax shelter in trusts for example.
Maintaining the integrity of the tax system is ongoing work. As exemptions are available for not for profit organisations, you can see that there is potential for integrity to be threatened. The Government is committed to the support it provides to the sector – we need to ensure that the support is going to where it’s needed.
And the final point is about fairness. Tax policies have to be fair to the sector and also to the taxpayer. Fairness is something you hear about a lot in relation to tax. You will have heard it in discussions about taxing large multinationals, collecting GST on online purchases, and a host of other topics. The bottom line is that everyone must pay their fair share of tax. For legitimate charities, tax exemptions are available and that is as it should be because society values your services.
In formulating tax policy, the Government has to weigh up what is good for the integrity of the tax system versus the will of society. That is quite an undertaking. We don’t really expect to do this on our own.
So how do we do it?
Tax policy process
The simple answer is that we follow a process for policy development, which ensures that policies are sound, workable and fit for purpose. It is a well-established, proven process known as the Generic Tax Policy Process (or GTPP) and this is simply an acknowledgement that Government cannot develop tax policy in isolation.
In assessing the merits of individual policy options relevant to the not-for-profit sector, consideration is given to the effect they would have on the growth of the charitable and non-profit sector in New Zealand and the resulting benefits to New Zealand.
The policy options should also be fair. A policy that provides financial support represents a cost to the taxpayer and Government.
The costs of different policy measures that need to be considered include:
- the cost to businesses, community and voluntary organisations and individuals of the costs of complying with the tax rules;
- administrative costs, that is, the cost to the Government of administering the tax rules, and
- what can be termed deadweight costs - the costs that arise from the effects of the tax system on decisions to produce, consume, work, save and invest .
Consideration of these benefits and costs will inevitably lead to policy trade-offs being made. These are increasingly important considerations. In times of economic adversity, it is necessary to ensure careful fiscal management and also to ensure that Government revenue is protected because certain Government services and functions must continue – preferably without having to borrow to fund them.
Maintaining a stable revenue stream is absolutely critical in retaining international confidence. But maintaining such a stream is not simply a matter of gathering as much tax as possible – the focus has been on making changes at the margin within our current framework to make it fairer and more efficient.
We are aiming for the best possible tax system designed by the best possible policy and supported by the best possible tax administration. A tax policy proposal is only good if it is workable and reflects the will of the people and is finely focused on its objectives. To be good policy, it must be practical and fit for purpose and the best way to achieve that is through proper public consultation, a key feature of the GTPP.
I therefore urge you to take advantage of opportunities to comment where tax policy proposals affect your work.
Charities de-registration
You may be aware that right at the moment, there is public consultation taking place on a matter affecting charities. On 18 July a consultation document Clarifying the tax consequences for deregistered charities was released for public comment. The consultation document sets out possible changes to the tax rules to clarify the tax consequences for charities that are removed from the Charities Register. Charities that register are eligible for tax exemptions.
This piece of work is an example of the quest for simplicity and clarity.
When de-registering, for whatever reason, a charity presently can face significant and complex tax implications. What is proposed in the consultation document is an earnest attempt to clarify and simplify those tax obligations.
The vast majority of charities who find themselves in this situation will, I hope find that their tax obligations are clearer. Most do try sincerely to observe and follow the rules. For others (a tiny minority) it is perhaps questionable whether they are in fact a charity.
It appears that they may have found themselves a loophole and exploited the rules pertaining to charities and taken advantage of the exemptions available. This mentality is the reason why tax rules become so complex. For these outfits, I can assure you we will come down hard on them. Cowboys like this do nothing for the community and turn the general public off donating making it even harder for the many reputable charities.
I urge you to read the proposals on Inland Revenue’s tax policy website.
Consultation closes on 23 August so you still have time to make your voice heard.
Further work
Looking ahead, the work we have on hand is not on a large scale. I think that generally speaking, we have the major policy settings about right for the not-for-profit sector. The focus will instead be on refinement and improvement of the overall integrity and coherence of the charitable income tax exemption and the tax incentives for charitable donations.
In particular, work will largely relate to charitable giving by the general public. As you know, donors may be eligible for tax relief on cash donations they make to done organisations. It’s important that donors are clear about who they can give to and legitimately claim tax relief on their donations.
The measures include:
- Resolving a number of technical problems relating to donee organisation requirements. The donee status requirements are different from those for charitable entities, and this has given rise to confusion and compliance costs for charities and donors;
- Dealing with transactions where there has not been a “true” gift. We have seen some schemes that allow charitable donations tax incentives to be claimed in circumstances when there has not been a “true” gift.
- Improving the Schedule 32 process for approving overseas-focussed charities. Donee organisations that send funds overseas or that carry out charitable purposes overseas pose specific risks. There is increased opportunity for serious wrongdoing through fraud and money laundering and it is more difficult to verify whether the charities are actually carrying out charitable purposes overseas.
The timing of this work will be determined as the Minister of Finance and I set the next 18 month tax policy work programme.
These are some of the current and upcoming policy matters that will affect the not-for-profit sector. But we should also remember that a good tax system comprises good tax policy supported by good tax administration and I’d like to turn now to something that affects you as equally as everyone else, regardless of your tax status.
Business transformation
I spoke before about the Government’s determination to minimise compliance costs and to keep things as simple as possible. I want to talk to you briefly about Inland Revenue’s administration and how the modernisation of the revenue system fits into New Zealand’s future, and therefore into your future.
The Government is committed to making it easier for customers to deal with government agencies. For example, you may be aware that over recent years Inland Revenue and the Charities Services have worked closely to enhance their services to charities.
But you will probably also know there are still many opportunities for further services improvement in a wider government context. Dealing with government services needs to be easier, less confusing and less expensive.
The world is changing and New Zealanders have changing expectations of how they interact with government. People want to be able to interact with government services when they want to – 24 hours, 7 days a week.
They want to be able to do business with government agencies as easily and safely as with any other business. Mobile services are becoming faster and easier to use. More people have tablets and smart phones, allowing people to self-manage their tax obligations and social support entitlements, whenever and wherever they are.
People want to spend less time on paperwork, especially on providing the same information to multiple government agencies.They want to do it online.
Agencies need to share information when that’s the right approach — while, of course, always protecting people’s privacy and security. This is all great, large scale stuff, but why focus on Inland Revenue?
It may seem obvious, but people can forget that the government uses taxpayers’ money to pay for services we all need, such as health care, social services, education, environmental protection and recreation. Inland Revenue plays a critical part in supporting New Zealanders every day, through the collection of taxes, distribution of social entitlements and the administration of KiwiSaver.
The revenue service delivers the funds to pay for most of the services that New Zealanders depend on. Vital services such as distributing $200 million a year in Child Support, or collecting more than $2billion in KiwiSaver contributions are provided directly by Inland Revenue. Touching the lives of so many New Zealanders – individuals, families, the non-profit sector and businesses – Inland Revenue will play a key role in the government’s desire for better public services for everyone.
New Zealand is recognised as a great place to live in and do business – we must keep working to ensure we stay that way. The Government is committed to meeting this expectation: delivering better and cheaper services and Inland Revenue’s transformation will play a leading part in delivering these changes to government services. Online and mobile services will be faster and easier, allowing people to manage their tax obligations and social entitlements with certainty and security.
At the same time government agencies need to be able to manage, use and share relevant and accurate information to provide better services and to protect against fraud. Sharing and using information appropriately will support government’s “no wrong door” approach across government.
Keeping the balance between protecting New Zealanders’ privacy and the security of their information while at the same time enhancing government’s ability to combat crime and fraud will remain a strong underpinning principle in this work.
Obviously Inland Revenue can’t make these changes on its own. We are looking to work with people, other government agencies and organisations that have the right skills to help us. There will be opportunities for businesses and other organisations to be involved throughout the change programme.
I hope you will take the opportunity to be part of this – the not-for-profit sector has much to gain from an efficiently running tax system.
Conclusion
Looking at Government’s tax policy activity in the not for profit space over the last few years, we can see that the Government has demonstrated the value it places on the sector by introducing tax incentives to provide financial support for the sector and simplifying policies to facilitate charitable giving.
In devising tax policy, the Government is keen to ensure continued support for the sector, but must balance that with the various considerations that come into play. That intention to provide support still remains, I assure you, but tax policy work in the foreseeable future is more modest in its scale compared to what has gone before.
To ensure that tax policies continue to support the sector, the Government relies on the sector to express its views on tax proposals. With the Generic Tax Policy Process, you have a voice and I, as Minister of Revenue, am keen that that voice is heard. By doing so you are contributing to the development of sound, practical tax policies affecting this very important sector of New Zealand’s society.
I hope my talk today has given you an insight into how tax policy is formulated and how and why the Government is considering the modernisation of the revenue system for New Zealanders. Thank you for the opportunity to discuss these matters with you.
Media contact: Rob Eaddy 027 459 6200