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Inland Revenue

Tax Policy

PUBLISHED 23 May 2002

Tax highlights of Budget 2002

Today's Budget provides an extra $146 million to Inland Revenue over four years:

  • $17 million to fund work on reducing tax compliance costs for small and medium-sized businesses.
  • $4.2 million for implementing new debt and hardship rules.
  • $26 million for audit activities.
  • $98.8 million to maintain the tax base.

For more information, see "Small business will benefit from IRD's budget boost".

The government is considering two options for reducing over-taxation of employer contributions to superannuation schemes: to reduce SSCWT for those earning under $38,000 a year to their marginal tax rate, or to extend the present 6 percent concessional rate for those earning over $60,000 to all income earners. See "Budget affirms commitment to security in retirement".

The government has made no decisions yet on Tax Review recommendations relating to taxation of inbound investment, exemption for overseas income of new migrants, and the application of the risk-free rate of return on offshore portfolio investment. For more information on the recommendations see our backgrounder.

All budget material is available at

Hon Dr Michael Cullen
Minister of Revenue


Small business will benefit from IRD's budget boost

"Budget 2002 provides $17 million over four years to fund further work by the Inland Revenue Department into simplifying the tax obligations of small and medium sized enterprises," Revenue Minister Michael Cullen said.

"For many small businesses, the compliance costs of tax are the biggest bugbear because they do not earn enough to incur big tax bills but have to plough through a lot of paperwork to establish that. And tax design tends to focus on the dynamics of the large corporate, often at the expense of the smaller enterprise.

"Yet small businesses dominate our economy, are an obvious source of economic innovation and offer us the best prospect for raising our sustainable growth rate," Dr Cullen said.

The IRD received a total increase over the four-year period of $146 million. Of the $129 million balance, $4.2 million would go into new debt and hardship rules, $98.8 million into maintaining the tax base and $26 million into audit activities.

"The increased enforcement budget is expected to generate a net fiscal gain for the Crown of $79 million a year, $317 million over four years. This is money the government can invest in social services and infrastructure for the benefit of all New Zealanders."

The government had been considering a number of recommendations from the McLeod Tax Review on the international tax regime. Those still to be consulted on were the introduction of a time-limited tax exemption for new migrants, not on their New Zealand income, but on income sourced from overseas and the application of the risk free rate of return method to offshore equity investment in a private rather than a business context.

Consultation on both proposals would be in accordance with the normal Generic Tax Policy Process, Dr Cullen said.

"I have ruled out the $1 million tax cap proposal as inequitable. I have also been advised by my officials that the proposed 18 per cent tax rate for new foreign direct investment is unworkable.

"They believe it would be impossible over the longer-term to maintain the boundary between new and existing investment, with a potential cost to the revenue of $500 million a year, and that it would not produce benefits of anything like this order to New Zealanders.

"However, before rejecting the idea, I will release their analysis for comment from interested parties," Dr Cullen said.

Contact: Patricia Herbert [press secretary] 04 471 9412 or 021 270 9013.
E-mail: [email protected]

Hon Dr Michael Cullen
Minister of Finance


Budget affirms commitment to security in retirement

Budget 2002 demonstrates the government's strong commitment to maintaining security of income for older New Zealanders, says Finance Minister Michael Cullen.

The budget figures show the New Zealand Superannuation Fund will have reached almost $9 billion by 2005-06 and that the projected surpluses over the forecast period will be sufficient to both meet the Fund contributions and the government's debt targets.

  2001-02 2002-03 2003-04 2004-05 2005-06
OBERAC $2.3 billion $2.3 billion $3.1 billion $3.9 billion $4.2 billion
NZSF transfers $0.6 billion $1.2 billion $1.8 billion $2.0 billion $2.1 billion
NZSF balance $0.6 billion $1.9 billion $3.9 billion $6.3 billion $8.9 billion
Net debt 16.8% gdp 16.8% gdp 16.8% gdp 16.2% gdp 15.5% gdp
Net debt less NZSF assets 16.3% gdp 15.2% gdp 13.9% gdp 11.6% gdp 9.3% gdp

Dr Cullen said the Fund continued the government's strong record on New Zealand Super.

"One of our first actions on coming into office was to reverse the previous government's decision to cut to 60 per cent the 65 per cent wage relativity floor set by the 1993 multi-party Accord. That added another $21 a week to the married couple rate.

"But even as we have protected the value of the public pension, we have also emphasised the need for people to save privately if they want a comfortable standard of living in retirement.

"The government has concluded that employment based superannuation schemes offer the greatest potential to encourage savings behaviour with the least risk to the revenue," Dr Cullen said.

"Employers' contributions are now generally taxed at 33 percent irrespective of the employee's individual tax rate. The options under review are:

  • to match the withholding tax paid by employers to the statutory marginal tax rate paid by the worker; or
  • to extend the 6 per cent concessional rate now enjoyed by those earning over $60,000 a year to all income earners.

"My intention is make the new regime effective from 1 April, 2004," Dr Cullen said.

Contact: Patricia Herbert [press secretary] 04 471 9412, 021 270 9013.
E-mail: [email protected]

Policy Advice Division
Inland Revenue Department

Background on McLeod Review international tax recommendations

Taxation of inbound investment

The Tax Review recommended that the company tax rate for non-residents be reduced from 33% to 18% and that the non-resident withholding tax rate on dividends (NRWT) be reduced from 15% to 2%. The review advanced two options for consideration. Under option one, the lower tax rate would apply to all foreign direct investment, while under option two (the Review's preferred option) the lower rate would be limited to investment by non-residents in "new" activities.

The Review regarded increased levels of foreign direct investment as essential in order to increase New Zealand's GDP per capita. Foreign direct investment provides productive capital without having to rely on domestic savings, and this can contribute to achieving higher economic output. To be of benefit, however, increased foreign direct investment must produce benefits to New Zealanders over and above the return provided to the foreign investor.

Sustaining any boundary between new and existing foreign direct investment is a key aspect of the Review's recommendation. Officials consider that the lower rates of tax cannot be restricted to new investment except as a transitional measure. Consequently, the annual fiscal cost of the proposal is expected to be around $500 million. While there would be significant benefits to the foreign investor, a reduction in tax on foreign investment seems unlikely to produce greater net benefits to New Zealanders.

As part of the tax policy process, officials' analysis of this issue will shortly be released for private sector comment. The government has indicated that if this analysis holds true following consultation, it will not implement a lower tax rate for foreign direct investment. However, given its importance to New Zealand's economic development, the tax treatment of foreign direct investment will be subject to further review.

Exemption for foreign sourced income and tax cap

The Tax Review suggested that the rules for taxing foreign sourced income deter highly skilled non-residents from working in New Zealand and recommended a temporary exemption for new residents from taxation on that income.

An issues paper which considers the benefits and potential design features of an exemption for foreign sourced income is being prepared as a basis for consultation. It will include consideration of options for targeting particular problem areas - for instance, expanding existing exemptions for interests in foreign life insurance policies and superannuation schemes to other types of foreign sourced income. Options for reform will need to take account of any proposed changes to the taxation of offshore portfolio investment.

To attract and retain more high-income individuals to live in New Zealand permanently, the Review recommended that the income tax liability of residents be limited to a set amount such as $1 million. The government has ruled out this proposal.

Outbound portfolio equity investment

The Tax Review highlighted problems with the tax rules that apply to New Zealanders investing overseas. At present, offshore portfolio equity investment outside the "grey list" countries is taxed fully on accrued gains under the foreign investment fund rules. Similar investments in "grey list" countries may be free of any New Zealand tax.

The Tax Review recommended application of a risk-free rate of return method (RFRM) to portfolio investments in offshore listed shares and foreign retail unit trusts - no matter the country of investment. This method would levy tax on an imputed risk-free return to an asset, based on the asset's value. As returns to risk would not be taxed, the actual tax rate on these investments would be lower, on average, than if full income were taxed.

However, as consultations have identified capital account investments as the main problem area, the government is exploring whether RFRM could be applied to investments on capital account. Consideration of these issues will be subject to the usual generic tax policy process.