Speech to the NZICA Special Interest Group
Wellington, Tuesday 27 May 2008
I am very pleased be here today to address your Special Interest Group on the tax changes announced in Budget 2008.
I plan to make a few brief comments on Budget tax matters, and then to invite your questions and comments.
If we can judge by post-Budget statements released by some of the large accountancy firms, your profession's response to the changes has, I think, been generally positive, if not enthusiastic.
The somewhat muted response may be the result of too-high expectations of what the Budget could deliver, but even then at least one firm commented that the tax cuts were "more generous than expected".
So what do people expect?
It may be that, with personal tax cuts tending to happen about only once a decade or so, when they do occur people expect them to be dramatic.
It may be that we need a series of smaller, more frequent and therefore more affordable tax cuts.
That way they might not be invested with too-high expectations.
In my view, the tax cuts announced and legislated for under urgency last week were long overdue.
They are not completely satisfactory to me and my party but they are a step in the right direction.
I supported their introduction and I am happy that they have been introduced.
However, they do not deal with the unfinished problem of the difference between the top personal tax rate, the trustee tax rate and the company tax rate.
I take special pleasure in the fact that the reduction of the company tax rate from 33% to 30%, with effect from this year, was a direct result of the Business Tax Review.
The establishment of the review was a key policy plank for my party in negotiating the confidence and supply agreement between Labour and UnitedFuture.
As you may know, I have long advocated a 30/30/30 approach to tax rates.
That would mean reducing the top personal tax rate and the trustee tax rate to the level of the new company tax rate.
Despite our present economic uncertainty, I believe there is scope for achieving those remaining reductions – and that we must pursue them.
I believe that they would stimulate productivity, investment and personal savings, at a time when they are especially needed.
A flatter alignment of tax rates would also help to deal with problems that arise as a result of the difference in these tax rates – such as companies and trusts being used to shelter personal income.
That creates unfairness in the tax system and undermines it.
On tax policy, UnitedFuture stands for an efficient and fair tax system, one that is easy to comply with and hard to avoid, one in which taxes are levied on broad base, and one with comparatively low, internationally competitive rates.
Our tax policy, which is to be announced shortly, will focus on these issues.
Budget 2008 also announced that the taxation bill to be introduced next month will include legislation to reduce tax-related compliance costs and remove tax impediments to the offshore expansion of New Zealand-resident companies.
These changes both result from tax policy reviews that have been under way for some time.
In December last year Dr Cullen and I released a discussion document seeking feed-back on a range of ideas aimed at reducing tax-related compliance costs for small and medium enterprises – or SMEs.
Even though tax compliance costs are a fact of business, SMEs, which make up the bulk of New Zealand businesses, bear a disproportionate burden of these costs.
It therefore makes sense to reduce compliance costs wherever possible so that smaller businesses can devote more of their resources to their core business activities.
Many of the possible changes outlined in the discussion document had to do with raising business tax thresholds.
That could result in reducing the number of tax returns a business has to file, the information it must supply, or the calculations it must make.
In other words, raising threshold could mean fewer tax matters for a business to deal with.
As announced in the budget, the forthcoming bill will introduce the first stage of the resulting changes, which will raise a number of tax thresholds to make life easier for smaller businesses.
The changes will allow, for example, more SME employers to file and pay PAYE deductions once a month instead of twice a month.
Likewise, raised thresholds will allow more employers to file and pay FBT annually rather than quarterly, and more taxpayers to file GST returns on a six-monthly basis rather than a two-monthly basis.
The second stage of the review will consider compliance cost reduction initiatives that represent more significant departures from the normal tax rules that businesses have identified, in consultation, as being desirable.
The continuing review of New Zealand's international tax rules has resulted in the second set of changes that the Budget announced would be included in the forthcoming bill.
That review, which is of enormous importance to New Zealand, has involved considerable consultation with businesses over the last couple of years.
The aim of the review is to boost the competitiveness of New Zealand businesses by bringing our international tax rules into line with the relevant rules of our main competitors.
Those changes will enable New Zealand-resident businesses to compete more effectively in foreign markets.
Many of you will be aware that the central feature of the reform is the introduction of a tax exemption for active income from the offshore operations of New Zealand-resident businesses.
That was announced in Budget 2007.
Our present rules tax that income, with the exception of income from operations in the so-called “grey list” of eight countries that our law singles out as having tax systems comparable to our own.
The active income exemption will be available to all controlled foreign companies in all jurisdictions, which means the grey list of eight is no longer required.
Budget 2008 announced that there would, however, be a grey list of one, which will consist of Australia.
Therefore New Zealand companies that set up operations in Australia, which is usually where our smaller businesses start when they decide to expand overseas, will not have to face the compliance costs associated with meeting the active business test.
It has already been announced that there will be a second stage of the review.
It will move to extend the active income exemption to non-portfolio foreign investment funds and financial institutions.
That stage of the review will also look at the possibility of introducing a relieving mechanism for non-resident withholding tax on dividends paid to shareholders if those dividends represent distributions of exempt active income.
An issues paper on how best to achieve the active income exemption for non-portfolio foreign investment funds will be released for consultation within the next couple of months.
As Minister of Revenue, I am pleased with the direction that tax reform has taken over the last three years.
Changes to the tax rules for business, investment, research and development, savings, charitable donations and now personal taxes have all helped to position New Zealand well for the future.
Much more remains to be done of course, and I am looking forward to progressing these and future reforms.