Policy Advice Division
Inland Revenue Department
Budget 2001 Tax Summary
Inland Revenue operations
Tax revenue and tax receipts forecasts
Specific fiscal risks - taxation
Inland Revenue operations
Child support. The minimum level of payment for Child Support will be raised from $10 to $12.75 a week, reflecting indexation for price movements since the present minimum was first set. The income cap, the maximum level of income for assessment purposes, is to be lifted from 2 to 2.5 times the average wage. The Government will announce details of the measure within the next few days.
Family assistance. Inland Revenue and the Department of Work and Income receive funding for a campaign to inform beneficiaries about the transition-to-work and in-work assistance (family assistance tax credits) for which they are eligible.
IRD funding. Inland Revenue receives new funding of $13.1 million a year to improve its enforcement capability and to help it recruit and retain staff.
Tax revenue and tax receipts forecasts
The Treasury has prepared the official set of forecasts of tax revenue and tax receipts for the Budget Economic and Fiscal Outlook. In line with established practice, Inland Revenue has prepared an independent set of tax forecasts, based in the short term on more detailed analysis of taxpayer information, and in the longer term reflecting the same underlying macroeconomic trends. Both sets of forecasts are published in the BEFU.
For the 2000/01 and 2001/02 fiscal years, Inland Revenue's forecasts of tax revenue are very similar to the Treasury's forecasts, with aggregate tax revenue forecast to be $29 million more in the current year and $56 million less for next year. Over subsequent years, Inland Revenue projects total tax revenue to be between $192 million and $325 million less than the Treasury's figures. These differences are well within estimated forecast uncertainty, and are in the lower range for historical differences in forecasts between the two departments.
The following commentary relates to forecasts of taxes collected by Inland Revenue. Direct tax revenue growth in the current year will be enhanced by some one-off factors, including the tax rate increases, exceptional returns from the investment sector, and well above average profits from primary producers and exporters. The benefits of increasing export volumes will be enhanced by strong commodity prices and the falling value of the NZ dollar. Some corporate taxpayers emerged from loss positions and began paying taxes this year. While returns to producers and exporters are expected to remain strong in the coming year, slower world growth and a slowly appreciating NZ dollar are projected to limit further growth in taxable profits. Profits from the banking, savings and investment sector are expected to decline over the coming year. Employment and wage growth over the period will lead to a greater share of national income being received (and largely spent) by households, and a lesser share being retained as corporate profits. Individuals' taxes will therefore grow faster than corporate taxes throughout the period. The flat outlook for fringe benefit tax (FBT) is the result of an anticipated gradual cashing-out of taxable fringe benefits, induced by the increased complexity of the FBT regime.
The growth in Inland Revenue's indirect tax revenues, principally GST, will be negative this year. There has been a major shift in the composition of total GST revenue, with substantial growth in Customs GST revenue more than offsetting the reduction in gross IRD GST revenue and an increase in refunds paid by IRD. All of these are attributable to the lower value of the NZ dollar, which has increased the value and economic share of imports and exports relative to those of locally produced goods and services. In future years, IRD and total GST revenue growth will both exceed the growth in nominal consumption, reflecting faster-growing contributions from inbound tourism and from residential investment.
Specific fiscal risks - taxation
Four tax-related specific fiscal risks are identified in the 2001 Budget. Two of these have been carried over from DEFU 2000, and two are new. One new risk is quantified, while the other risks are all unquantified.
The new, quantified risk is tax simplification, reflecting the expected small negative fiscal impact of adopting the proposals outlined in the recently released discussion document More time for business: tax simplification for small business.
The new, unquantified risk relates to tax on superannuation funds. A review of the taxation laws for superannuation and savings schemes has been proposed, but details of such a review have yet to be finalised. There will be no fiscal impact within the term of this Government.
The unquantified risks carried over from DEFU99 are:
- Trans-Tasman triangular tax relief (an imputation credits availability issue). The proposed concessions would have a negative impact on the operating balance.
- Imported services and financial service reviews (considered likely to lead to amendments to the GST Act 1985). These reviews have the potential to increase or decrease future GST revenue.
Specific Fiscal Risks - Taxation
Quantified Fiscal Risks
Inland Revenue - tax simplification (new risk)
The Government is considering tax simplification measures that were outlined in the discussion document More Time for Business released earlier this month. The areas targeted for simplification include:
- the provisional tax rules
- aspects of PAYE and resident withholding tax (RWT) rules
- the need for end-of-year tax adjustments
- non-resident contractors' withholding tax (NRCWT) rules
- return non-filing criteria
- family assistance rules.
In addition, a number of new technology tools are being considered to assist taxpayers in complying with their tax obligations.
The adoption of these measures is likely to decrease the operating balance by between $5 million and $20 million per year once initial timing impacts have occurred.
Source: Inland Revenue Department
[B.3 page 110]
Unquantified Fiscal Risks
Inland Revenue - imported services and financial services reviews (unchanged risk)
In March 1999 a discussion document entitled GST: A Review outlined potential longer-term changes to the Goods and Services Tax Act 1985 of taxing financial services and imported services (which include electronic commerce) and asked for comments. With the growth of imported services and financial services, revenue from GST will reflect a smaller portion of the economy over time unless the tax base is extended accordingly. The Government is considering issuing more detailed discussion documents both on imported services and on financial services, and these are likely to contain proposals that will result in amendments to the GST Act within the forecast period.
Inland Revenue - tax on superannuation funds (new risk)
Following the introduction of the Crown funded New Zealand Superannuation Fund the Government is considering a review of the taxation laws of other superannuation and savings schemes. The details of the review are yet to be finalised and the impacts are unknown at this stage, but are likely to decrease the operating balance. Any impacts from the review would not be expected to occur prior to 2003/04.
Inland Revenue - trans-tasman triangular tax relief (unchanged risk)
Imputation credits generated by a New Zealand subsidiary company with a non-resident parent company cannot be passed on to New Zealand shareholders of the parent company. As such, New Zealand taxes residents twice on their New Zealand sourced income. The Government is considering providing relief for this aspect of double taxation, in a trans-Tasman context only.
This risk is unquantified as no clear estimate of the impact of this proposal has been finalised.
[B.3 page 114]