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Inland Revenue

Tax Policy

PUBLISHED 20 June 2001

Issues paper planned for trans-Tasman triangular tax problem

A proposed mechanism for relieving Australian and New Zealand investors of the perennial taxation problem associated with 'triangular' trans-Tasman investment will be the subject of a joint Australia-New Zealand issues paper. This is one of the issues discussed in a speech delivered by Revenue Minister Michael Cullen to the Deloitte Tax Update Seminar in Wellington today. Other issues covered in the speech include today's Tax Review release and retrospective legislation. See speech.

Hon Dr Michael Cullen
Minister of Revenue


Address to Deloittes's Tax Update Seminar

ParkRoyal Hotel, Wellington

I am pleased to have been invited to address you today. I shall take the opportunity to update you on a number of tax policy issues and progress in several areas.

I was recently very interested to read in one of our business weeklies that the $20 billion of income tax collected for 1995 may have been collected illegally. The reporter apparently arrived at this conclusion by extrapolating from a court decision, now under appeal, relating to a particular case. One assessment may have been invalid: therefore every assessment may be invalid, in our reporter's view. My advice to the tax community is not to wait up for your refund.

To turn to real issues, this year is living up to predictions that it would be a very busy one on the tax policy front.

There will be many opportunities for consulting on tax policy development. In May we released the first in a series of discussion documents devoted to different aspects of tax simplification. The first of the series, More Time for Business, looks at possibilities for simplifying the tax system from the perspective of small businesses. Others in the simplification series will deal with the taxation of Maori authorities, the rewrite of the Income Tax Act, and proposals emerging from the review of the compliance and penalties legislation. These will appear over the next month or two.

And today The Tax Review delivered an independent and radical analysis which will no doubt spark a lively "first principles" debate on taxation.

The Review will now conduct a second round of consultations before reporting finally to the Government in October this year.

I will take this opportunity to stress once again, that no proposals for significant tax change from the Review will be implemented without first seeking a mandate from the electorate through the 2002 general election.

The Government has never indicated that we would expect to pick up every recommendation the Review puts forward and I have always hoped that all political parties will feel free to draw on the final report as a resource.

In that spirit, I intend to refrain as much as possible from commenting directly on specific issues the inquiry has raised. New Zealand needs a broad discussion involving many voices and I encourage individuals and organisations to make submissions to the Review.

Last week we also released the discussion document Tax and charities. It looks at the government support that charitable organisations receive through the tax system, and various tax issues relating to charities. The discussion document presents options for modernising the definition of "charitable purpose", which determines if an organisation qualifies as a charity or not for tax purposes. It also sets out options and proposals for improving the accountability of charitable organisations receiving government support through the tax system. Most of this support takes the form of income tax exemptions and tax rebates and deductions for donations.

The definition of "charitable purpose" is based on English law that goes back 400 years. Amongst examples of "charitable purpose" in the Charitable Uses Act of 1601 are the aid of persons decayed; the relief of the impotent, prisoners and captives; and the marriage of poor maids. The definition has obviously evolved since then.

In my years as a Member of Parliament I have received many suggestions -- from charities, businesses and individuals -- that the definition of "charity" for tax purposes should be narrowed or modified in some way. Some contend that the tax exemption is too widely available and gives some businesses operating as charities an unfair advantage over other businesses. For these reasons I will be very interested to see the public's submissions on the options and proposals set out in the discussion document.

A discussion document on GST and imported services is also planned for the end of the month. It will look at GST in light of the changes that have taken place in the economy, commerce and electronic technology over the last 15 years. We are importing more services than we did when GST was introduced, and the volume is expected to increase. The problem is that services bought from New Zealand companies attract GST, whereas those purchased from a foreign company supplying them from another country do not.

The discussion document will set out proposals designed to ensure that the GST system adjusts to the electronic commerce environment and does not unfairly disadvantage New Zealand service industries. The main effect of the proposals will be on businesses making exempt supplies, such as financial services.

While on the subject of GST, I would like to devote a few words to retrospective legislation. This is in the context of the Government's recent announcement that it would legislate to confirm the correct policy position, as understood by taxpayers and government, on the application of GST to certain services before 1999. These are services contracted for outside New Zealand but supplied here.

A common reaction to the announcement has been that the proposed legislation is retrospective, so is necessarily bad. However, also being considered for inclusion in the same taxation bill is another piece of retrospective legislation that has been warmly greeted. I am referring to the proposed legislation to remove uncertainty about whether Inland Revenue can transfer overpaid tax to a period in which a taxpayer has no tax liability, and hence whether interest is to be paid on the excess for that period.

As a matter of general principle, governments try -- and should try -- to avoid retrospective legislation on major issues. There are, however, circumstances in which its use is not only defensible and justifiable, but also necessary in the interests of good government. But, generally speaking, the use of retrospective legislation should be used only in extraordinary circumstances -- and more often than not when it is in favour of the taxpayer, rather than the crown.

The message I would like to emerge clearly from this discussion is that you can rely upon the law. Retrospective legislation will continue to be used only in exceptional circumstances. In the case of the proposed GST amendments, a serious fiscal risk arose from taxpayers making retrospective claims for GST refunds, and the use of retrospective legislation is justified under the circumstances.

In last month's Budget I announced that it was time to start moving towards reforming the rules on the taxation of savings for retirement through private superannuation schemes. Therefore I had instructed officials to work with savings industry representatives to report by the end of the year on ways to lift private savings.

My thinking so far has focused on two main approaches. One is to introduce a tax incentive at the contribution level, providing savers with an immediate pay-off. The other is to defer taxing the earnings made by a fund until withdrawal. However, I am open to considering alternatives to these approaches.

In developing policy to increase savings by means of tax incentives, several important issues must be considered. There is the incentive itself: if you are going to provide one, where will it work best? Then there is the need to minimise fiscal risk and the question of maintaining neutrality between different types of financial products.

As the first step in the process, officials will be consulting informally with various members of the savings industry to canvass views on options for increasing savings.

I shall conclude by updating you on the Trans-Tasman triangular taxation issue. There has been some progress towards resolving the longstanding problem of the taxation of triangular investment between Australia and New Zealand. Triangular investment occurs when an Australian or New Zealander invests through a company resident in the other country that earns income in the country of the shareholder.

The taxation problem arises because Australia and New Zealand allow only tax paid in their own countries to generate imputation credits, and only resident companies to pass on imputation credits to their shareholders.

This means that Australian companies pay tax in New Zealand but cannot provide imputation credits to their New Zealand shareholders, so they are effectively taxed twice on the same income. Likewise, New Zealand companies pay tax in Australia but cannot provide franking credits to their Australian shareholders, who are also taxed twice as a result.

This is a problem that obviously requires a bilateral solution -- one that preserves the tax bases of both countries and is acceptable to government and business in both countries. To that end, New Zealand and Australian officials have been discussing triangular taxation, and I have been in correspondence with Peter Costello about the matter.

I am happy to report that we have agreed that our officials will develop a mechanism for relieving affected Australian and New Zealand investors. The final agreement of the two governments to such a mechanism is subject, of course, to its benefits outweighing its costs before it can be considered for implementation.

We have further agreed that the mechanism should be one that allocates both franking and imputation credits to shareholders in proportion to their shareholding of the company, a mechanism known as pro rata allocation. Obviously, however, imputation credits will be useful only to New Zealand shareholders, and franking credits will be useful only to Australian shareholders. This approach effectively eliminates the double taxation of those affected in triangular cases.

The next step is to consult widely with Australian and New Zealand business, by means of a joint Australia/New Zealand issues paper that will set out the proposed mechanism and seek submissions on detailed proposals. If all goes well, the issues paper should be ready for publication by the end of the year.

I wish you a very successful seminar. Thank you.