Govt tax policy work programme announced
Revenue Minister Peter Dunne today announced the contents of the government's tax policy work programme over the next few months.
High on the list are the business tax review, measures to increase productivity and growth, and fundamental changes to savings policy and New Zealand’s international tax rules.
The work programme will be an interim one until the resource and policy requirements of the business tax review are clearer, Mr Dunne told the annual conference of the International Fiscal Association.
"The business tax review was one of several key projects that emerged from the confidence and supply agreements signed after the election," Mr Dunne said. "The others were a new system of tax rebates for charities, a discussion document on income splitting, and a review of racing industry rules.
"The aim of the business tax review is to ensure that the tax system provides better incentives for productivity gains and improved competitiveness with Australia.
"Related measures include reviews of the level of withholding rates in our double tax agreements and of the tax rules that govern outbound investment from New Zealand into foreign subsidiaries.
"The other major focus of the work programme is to encourage savings and improve the way they are used. Work here involves the introduction of KiwiSaver, relieving the over-taxation of people who save through New Zealand-managed funds, and applying consistent tax rules to offshore portfolio investments in shares.
"Work programme measures to ensure that the tax rules operate smoothly, fairly and efficiently include reviews of the tax implications of the new International Financial Reporting Standards, new tax rules for both limited and ordinary partnerships, and completion of the rewrite of the Income Tax Act.
"In a similar vein, the government is considering changes to the operation of the shortfall penalty for having an 'unacceptable tax position', details of which I hope to announce over the next few weeks.
"Revenue base maintenance is always an essential feature of the work programme, to counter tax avoidance and ensure the reliable flow of revenue to government. To this end, the interim work programme includes a timely review of the use of imputation credits", Mr Dunne said.
- Business tax review
- Review of the taxation of partnership income, including limited partnerships
- Depreciation issues including:
- depreciation loadings
- losses on disposal of buildings
- Geothermal exploration issues
- Gas exploration issues
- Tax consequences of International Financial Reporting Standards
- A review of non-resident withholding tax treaty rates
- A review of the rules that govern outbound controlled foreign company investment, including foreign dividend withholding payment and conduit
- Consideration of an exemption from the foreign investment fund rules for certain Australian super fund investments
- DTA negotiations
- OECD initiatives, including tax information agreements
- KiwiSaver (work-based savings)
- Collective investment vehicle pass-through proposals
- Taxation of outbound portfolio (foreign investment fund) investment
- Excessive salary sacrifice
- A review of the use of imputation credits
- GST issues
- Rewrite of the Income Tax Act
- May 2005 tax bill
- May 2006 tax bill
- November 2006 tax bill
- Indexation of tax rates
- Specific compliance and penalties issues
- New tax rebate rules for charities
- Income splitting discussion document
- Review of the racing tax rules
- Confirmation of tax rates for 2006-07
- Tax agents and their interface with IRD
- Westpac’s New Zealand corporatisation
- GST matters
- Child support
- Student loans
Contact: Ainslie Fenwick, revenue advisor, 04 471 9728 or 021 270 9052
Address to the 2006 Conference of the International Fiscal Association
Millennium Hotel, Rotorua
Friday 3 March 2006 at 10:15 am
I am very pleased to have been invited to open your conference today.
The tax policy work programme that I am announcing today includes three important items that were part of the post-election confidence and supply agreement that I signed on behalf of United Future with Labour.
- a major review of business tax rules, with a view to ensuring the system works to give better incentives for productivity gains and improved competitiveness with Australia,
- the development of a new tax rebate regime for charities, and
- the preparation of a government discussion document on the merits of income splitting for families.
We also agreed that no legislation for the proposed carbon tax would be introduced in the absence of new analysis.
We have since seen the cancellation of the proposed tax.
A review of racing industry taxes also features on the work programme as a result of the confidence and supply agreement between New Zealand First and Labour.
All these matters represent significant new lines of work in the work programme.
The government's wider policy goals for the next three years include savings, productivity and growth, education and skills, science and innovation, and export growth.
Tax policy, which can have substantial and wide-ranging effects on the economy, has an important role to play in several of those areas – especially by encouraging productivity and growth, and encouraging savings and ensuring that they flow to where they are most valuable.
The government's tax policy work programme is usually developed at the beginning of the electoral cycle and then reviewed and updated half-way through.
New and updated work programmes are made public, for purposes of transparency and to ensure there are as few "surprises" as possible.
That is all part of the widely praised generic tax policy process.
This work programme is an interim one that covers work that is under way, or soon will be, including matters that have been carried over from the previous work programme, but does not extend much beyond the middle of the year.
The reason is simple.
The business tax review will involve a substantial commitment of tax policy resources and may include consideration of a variety of tax policy issues that may overtake the items on this interim work programme.
A finalised tax policy work programme to June 2007 will be announced after the resource and policy implications of the business tax review become clearer.
The taxation bill introduced in May last year is under consideration by the Finance and Expenditure Committee, which is expected to report back to Parliament in time for passage of the bill by the end of March.
That wide-ranging bill introduces a number of major reforms.
They include major changes to the tax depreciation, fringe benefit tax and securities lending rules.
They also include the introduction of measures to make tax easier for small businesses and measures to improve our access to worldwide capital, skills and labour.
May 2006 will see the introduction of another taxation bill, the first of the year.
I will be describing some of its contents shortly.
The tax measures presented on the work programme have a number of key objectives.
- encouraging productivity, growth and international competitiveness,
- encouraging savings and improving the way they are used, and
- ensuring that the tax system operates smoothly, fairly and efficiently.
It is critical that the tax system does not stand in the way of businesses growing and thriving in New Zealand.
Therefore we need to make sure that our tax rules are internationally competitive.
Business tax review
The business tax review is the major new item on the tax policy work programme.
It was a critical part of the agreement between United Future and Labour, and I am personally strongly committed to ensuring the outcome is both significant and beneficial.
The goal is to ensure that the tax system provides better incentives for productivity gains and improved competitiveness with Australia.
Policy officials from Inland Revenue and the Treasury are working intensively on this issue with the Minister of Finance and me.
Proposals for consultation will be released in the middle of the year.
We intend that the new regime take effect from 1 April 2008.
NRWT treaty rates
As announced late last year, we are reviewing the level of withholding tax rates covered in our double tax agreements, including our very important agreement with Australia.
Australia has reduced withholding rates on interest, dividends and royalties in its double tax agreements with the United Kingdom and the United States.
In view of these developments, New Zealand is reviewing its own policy on withholding rates, and we hope to come to a decision on the matter in the course of the year.
Outbound CFC investment
Also under review are the tax rules that govern outbound investment from New Zealand into foreign subsidiaries.
The review has the potential to affect the rules on controlled foreign companies, foreign dividend withholding payments and conduit relief.
The main matter under consideration is whether there should be an active-passive distinction in the tax treatment of these subsidiaries – in other words, whether substantive economic activity such as manufacturing should be treated differently from passive income such as dividends, interest and royalties.
Other options for relief that do not threaten New Zealand's tax base are also under consideration.
Australian super funds
The next taxation bill is likely to include legislation to exempt job-related superannuation schemes in Australia from New Zealand's foreign investment fund rules.
This will mean that Australians and returning New Zealanders who come here for long-term employment will no longer have to pay tax in New Zealand on their interests in those Australian super schemes – thus removing a disincentive to coming to work in New Zealand.
It is also important that the tax system does not stand in the way of capital flowing to its most productive use.
As I mentioned earlier, changes to the depreciation rules are a major item in the taxation bill that is currently before Parliament.
These proposed changes will reduce government revenue by an estimated $1 billion over the next four years, but offsetting that is our ongoing commitment to ensuring that the tax depreciation rules work well and minimise distortions.
Work will continue on a range of further tax depreciation issues.
They include examining whether depreciation loading should apply to long-lived infrastructure assets such as roads, bridges and wharves, and the case for allowing losses arising from the disposal or scrapping of buildings.
Geothermal exploration issues
The government is looking at tax issues relating to exploration and development of geothermal energy, in response to concerns raised by companies involved in power generation.
The goal is to ensure that the tax rules do not deny tax deductions for true business costs.
I understand there has been a good response to an issues paper released late last year suggesting changes to the tax treatment of expenditure on geothermal wells.
It seems that submissions agree with the thrust of the suggested changes but – once again – the devil is in the detail.
Officials are working through matters raised in submissions and will be reporting to Ministers within the next few weeks.
Work also continues on a range of tax issues raised by the petroleum industry, which has already resulted in one significant legislative change.
Early last year, a law change exempting offshore oil rigs from New Zealand income tax came into effect, as part of a package of measures designed to encourage more gas exploration in New Zealand.
That change was made in response to industry concern that our tax law was creating perverse incentives that meant that oil rigs would not stay in New Zealand for more than six months in any 12-month period.
Further work will include a review of boundaries between the tax treatments of onshore and offshore gas exploration.
Another major focus of the work programme is work to encourage savings and improve how they are used.
This includes making the tax rules consistent between the different types of entities with which people save.
The KiwiSaver Bill, which was tabled in Parliament this week, introduces a voluntary work-based savings scheme designed to encourage long-term savings habits.
Inland Revenue will be the central administrator of the scheme.
Its role will include:
- preparing information packs to employers for distribution to employees,
- allocating default schemes to participants who do not choose their own and giving them investment statements about the schemes,
- receiving contributions from employers and others and on-paying them, with interest, to providers,
- paying the $1000 contribution the government will make to each participant, and administering contribution "holidays" for those who want them.
KiwiSaver has been designed to make use of existing resources such the as PAYE system, as far as possible.
Collective Investment Vehicles
Related changes to be part of the May 2006 tax bill will relieve the over-taxation of people saving through New Zealand-managed funds such as superannuation funds and unit trusts.
The current tax treatment of these vehicles discourages people from investing in them, though they can provide an efficient way for smaller investors to spread their investment risk.
People who invest through CIVs that elect into the new rules will benefit in two ways: – realised gains on shares in New Zealand companies will not be taxed, and taxable income will flow through to investors and be taxed at their personal tax rate.
One of the things the new CIV rules will do is to prevent low-income people who invest through KiwiSaver funds from being over-taxed, so it is important that the start date for that element of the new rules be the same as for KiwiSaver – 1 April 2007.
Outbound portfolio investment
The government's proposals for applying consistent tax rules to offshore portfolio investments in shares have attracted a lot of media and industry comment of late.
The most recent flurry of interest has undoubtedly been stimulated in part by the extensive consultation that has taken place with interested parties over the last few weeks – with funds, investment advisors, professional associations, tax advisors – the lot.
I was naturally drawn to sympathetic comments by Jo Doolan in her column in the Independent – and here I quote:
"The government and officials have bent over backwards to reach an equitable solution acceptable to all interested parties. Resolving this complex and fraught issue should result in an Oscar nomination."
We can only wonder which Oscar category she had in mind.
Consultation continues on possible modifications to the original proposals.
Any proposed solutions will face challenges, but changing the current rules is important for a number of reasons, not least of which is to prevent investors through KiwiSaver funds from being taxed more heavily than direct investors.
As has been reported, one of the modifications officials are consulting on is treating that portfolio investment in Australian-resident companies as if it were investment within New Zealand, given our very important economic relationship with Australia.
I look forward to hearing about the feedback on the modifications.
Also likely to be included in the next tax bill are changes to counter extreme "salary sacrifice" by some employees to lower the amount of tax they pay.
It is all a matter of degree.
The government obviously wants to encourage people to save for retirement.
However, it is against the spirit of the law – and unfair to other taxpayers – for people who already have substantial income or assets to be able to reduce salary in return for increased employer superannuation contributions, merely to reduce tax.
Changes to the rules on employer superannuation contributions have been suggested in an issues paper released last month for public comment, and I look forward to hearing about what you think of the suggested changes.
Ensuring that the tax rules operate smoothly, fairly and efficiently is also a key concern of the work programme.
For this reason, the tax implications of the new International Financial Reporting Standards have been included in the work programme.
As you know, the Income Tax Act regularly relies on financial reporting and generally accepted accounting practice – or GAAP.
Once adopted, the new standards will change reporting outcomes significantly in some cases, and there will be potential tax consequences.
Therefore officials are reviewing the interrelationship of the new standards, existing GAAP and income tax law and plan to release within the next two or three months an issues paper that looks at necessary legislative changes.
The review of partnerships continues, following on from the development by the Ministry of Economic Development of new limited partnership rules.
Officials will continue to consult with stakeholders, and the government may be in a position later in the year to issue a discussion document setting out proposals for tax rules to apply to both limited and ordinary partnerships.
Compliance and penalties
A particular concern in the area of ensuring that the tax laws work well, and one that I know is of interest to many people here today, relates to the operation of one of the shortfall penalties in the Tax Administration Act.
Practitioners have highlighted circumstances where the law seems to be wrong.
In particular, penalties for taking an "unacceptable tax position" are being applied to a wider range of shortfalls than was envisaged by Parliament when it passed the legislation.
Obviously, this is having an adverse effect on voluntary compliance.
When it was developed, the penalty in question was aimed at ensuring that taxpayers take extra care when there is potential for significant shortfalls, and was originally a penalty for "unacceptable interpretations".
However, that wording was changed in 2003 because it was too easy for taxpayers to argue that they had not "interpreted" the law.
We are considering allowing taxpayers who have incurred this penalty to have their positions reviewed in cases where there has been a clear mistake or simple oversight and the taxpayers concerned had sought to rectify that position.
I am treating this measure as a matter of urgency, and looking at a short-term solution while a longer term solution is developed.
I hope to be able to make an announcement on the matter over the next few weeks.
This will be an important year for the rewrite of the Income Tax Act, which began back in the early 1990s.
Later in the year I hope that it will be possible to introduce another income tax bill that brings into effect the rewrite of all the parts that remained when new parts A to E were enacted in 2004.
In the meantime, exposure drafts of further parts in rewritten form will continue to be released progressively for comment.
I will be particularly pleased to introduce the final rewrite bill since I was Minister of Revenue when, as part of the rewrite, the new core provisions were enacted, in 1996.
As I said at the time, they represented a very important development in the history of our tax laws.
I want to pay a particular tribute to Sir Ivor Richardson for his patience and dedication over a long period of time in seeing to near fruition a mammoth task that other jurisdictions have found far too complicated.
Revenue base maintenance has always been an important part of the tax policy work programme, with each taxation bill containing measures to counter tax avoidance and ensure the reliable flow of revenue to government.
The interim work programme includes a review of the use of imputation credits.
This item has arisen because the government has recently had to address three separate base maintenance problems involving imputation credits.
It is therefore timely that we review the matter of which shareholders should be able to use imputation credits and then, depending on the answer, consider what rules are necessary to reinforce that.
Officials are likely to start work on the project about mid-year.
Inland Revenue's Briefing to Incoming Ministers raised concerns about the continued integrity of the tax system.
It graphically highlighted the extent to which people are using trusts and the like to lower the level of tax they pay.
We have yet to consider the matter in detail or make any policy decisions.
We shall, however, be looking at whether there are any policy issues that need to be addressed and, if so, how.
Obviously, we will want to ensure that anything emerging from this is consistent with the direction taken by the business tax review.
To conclude, I am looking forward to working with you once more as Minister of Revenue.
This is a portfolio I like and have known well for years – from being Opposition spokesperson in the early 1990s, through to being Minister and then select committee chair, and now Minister again.
When I was first Minister of Revenue in 1996 we had the enactment of the then new compliance and penalties legislation, the introduction of new disputes procedures, and the enactment of the core provisions – as I mentioned earlier.
And we also had the last round of substantive cuts in taxation.
Those were only some of the developments in what was an extremely busy time on the tax front.
As Minister again a decade later, I am solely responsible for all revenue areas except tax policy.
Dr Cullen and I work together on that, we have a regular meeting once a week to go through policy issues, and all policy decisions are jointly made.
There will be limits, of course, to the number of tax changes that can be put into effect immediately.
Dr Cullen has indicated that this year's budget will be tight, and there is little leeway for new expenditure.
Those constraints also apply to tax policy.
Any tax changes that reduce revenue have to be seen in the same light as expenditure proposals.
And any tax changes that have a revenue cost – even if, for example, they reduce compliance costs or increase fairness – must be prioritised along with increases in areas such as health and roads.
In my other role as Associate Minister of Health, I am naturally concerned about funding for hospitals and medicines, and as one who has long been interested in Wellington's roading problems, I would of course like to see money go to building Transmission Gully as soon as possible, and forgetting about the nonsense of building a new highway out into the sea.
But in the end, it is a matter of trade-offs that will affect what can be done.
We have always to aim for the best policy outcome – whether it be a business friendly, and internationally competitive tax regime, or an infrastructure necessity like Transmission Gully, or the best schools in the world – but we also have to be able to pay for our dreams.
Nevertheless, the work programme I have announced today is comprehensive and ambitious.
It includes putting in place the foundations of fundamental changes to savings policy, the business tax review, a review of almost all aspects of international tax rules, further changes to depreciation, and completion of the rewrite of the Income Tax Act.
It is an exciting time to be Minister of Revenue, and I look forward to the ensuing dialogue with you and the associations you represent, and I wish you all the best for a successful conference.