Address to NZ Institute of Chartered Accountants
(NZICA) Special Interest Group Wairarapa
Solway Park, Copthorne Resort, Masterton
Thank you for inviting me to speak to your organisation today.
With the current international financial crisis, tax has moved into the spotlight internationally, with governments all over the world facing greater pressures to preserve their revenue base.
New Zealand is no exception.
As Minister of Revenue, I am acutely aware of the need to ensure that our tax system is resilient enough to weather the economic downturn and that tax revenue remains sufficient to finance government spending on essential services, at the levels New Zealanders take as their birthright.
You have asked me to speak today on 'The new Government's tax policy vision', which I shall attempt to do briefly - in the context of the current economic and fiscal environment, the Government's plans for tax policy development now and in the medium term, some of the administrative problems that are putting the efficient operation of the tax system at risk, and the progress of legislation that is before Parliament.
I will then be happy to answer any questions you may have.
The flow-on effects of the international financial crisis continue to weigh on economies worldwide, and it is likely to be some time before economic activity returns to full capacity
The crisis is also clearly affecting New Zealand.
Gross domestic product, or GDP, which measures the production of goods and services in New Zealand, contracted in 2008, while the unemployment rate rose from 3.7 percent in the March quarter 2008 to 5 percent in the March quarter 2009.
Lower production of goods and services and fewer people employed will mean less tax revenue for the Government.
For the nine months to March 2009 the Government's operating balance, which is the difference between government revenue and expenses, showed a deficit of $7.7 billion.
Budget deficits add to gross debt, which the Treasury projects could increase to above 70 percent of GDP by the year ended June 2023, in the absence of any policy changes.
Such increases in government debt would not be prudent fiscal management.
They would raise the cost of borrowing for New Zealand businesses and households because lenders would demand a higher rate of return to compensate them for the additional risk arising from the debt.
This would lead to higher interest rates and further reduction in economic activity.
The government's current and projected fiscal position therefore constrains tax policy choices and places greater emphasis on maintaining revenue flows.
The tax policy work programme
The Government's new tax policy programme, which was released in March, focuses on better positioning New Zealand in the world economy and maintaining tax revenue during the current financial crisis.
Government commitments are top of the agenda on the work programme.
They include the tax components of the post-election action plan, and Confidence and Supply Agreements in relation to alignment of personal, company and trustee tax rates, and in relation to income splitting.
High-priority projects on the work programme include the support of legislation before Parliament and a number of specific projects which I will comment on shortly.
Other high-priority work includes the following:
- designing a possible exemption from approved issuer levy and NRWT for New Zealand bonds issued to non-residents;
- tax base maintenance and broadening;
- the work of the Capital Market Development Taskforce, the Job Summit and other forums on tax issues;
- further charitable giving initiatives;
- child support and shared care;
- negotiation and maintenance of double tax agreements with other countries;
- the continuing review of the use of imputation credits;
- the continuing reform of our international tax rules;
- mutual recognition between New Zealand and Australia of imputation and franking credits, especially in relation to the Australian tax review; and
- policy work to support the improvement of systems within the tax administration.
Parts of the work programme have already been achieved.
National's post-election tax package was introduced and passed into law before Christmas, with personal tax cuts having taken effect from 1April.
Relief measures bill
We have also achieved the enactment of tax changes announced in February as part of package of relief measures aimed at helping businesses to weather the economic crisis.
The announced measures included reducing the use of money interest rate for underpayments of tax, which went down from 14.24 percent to 9.73 percent.
The rate for overpayments went down correspondingly, from 6.6 percent to 4.23 percent.
That change was made by Order in Council and took effect from 1 March.
Within a few days of the announcement, a taxation bill that was introduced under urgency provided for the other tax changes that formed part of the relief package.
They were enacted in March, and came into force on 1 April.
Those changes were aimed at easing the burden of tax on cash flow for smaller businesses, in particular, and making it easier and less expensive for them to pay taxes.
For many businesses, cash flows are especially tight at present.
One of the most important measures was the removal of the 5 percent "uplift" ratio in the calculation and payment of provisional tax for this and the next income year, given that we are clearly in a time of economic contraction nationally.
That should help to relieve some of the pressure on smaller businesses, in particular, by allowing them to hold on to tax monies longer.
The new legislation also makes it easier for individual taxpayers to use the standard uplift method of provisional tax rather than estimating their income, thus reducing their compliance costs and their exposure to use of money interest.
This change was part of the omnibus taxation bill that was introduced last July and is still before Parliament, but it was included in February's relief package of legislative changes to ensure speedy enactment.
Practical changes to a number of tax thresholds were also part of the relief package.
Those changes can lower costs for many businesses by reducing the number of returns they have to fill in, or the number of calculations they have to do, and the number of tax payments they have to make.
Some of the measures will also allow businesses to hold onto money longer.
By way of example, the GST payments threshold has been raised from $1.3 million to $2 million.
That will allow more businesses to enjoy the cash flow advantages of accounting for GST when payment from invoices is actually received rather than when the invoices are issued, where there can often be a big time lag or, in some cases, non-payment.
As another example, the PAYE once-a-month filing threshold has been raised from $100,000 to $500,000, which will allow more employers to file and pay PAYE once a month rather than twice a month.
This is a small but important measure to ease cash flow.
These are only two of the recently enacted threshold changes, all intended to make things easier for businesses in this difficult economic climate.
I will now turn to more detailed descriptions of some of the major commitments and projects on the work programme.
30 percent alignment
Alignment of company, top personal and trustee tax rates is a medium term-goal on the work programme.
Our economic and fiscal position will clearly limit our ability to reach this goal in the short term unless there is a quick turnaround in conditions.
I have long advocated a 30/30/30 percent alignment of these rates as a simple solution to problems such as individuals using companies and trusts to shelter personal income.
The work programme contributes to this goal through its focus on maintenance of the tax base.
That will help to ensure there is sufficient fiscal room to lower tax rates later on.
The next step, therefore, will be to consider base broadening and tax design issues as part of developing a revenue strategy, responding to what emerges from Australia's comprehensive review of its tax system, and considering alignment options for the future.
Setting out clear steps towards alignment would then be a primary focus of the next 18-month tax policy work programme.
The Australian review and mutual recognition
New Zealand's submission to the comprehensive Australian review, 'Australia's Future Tax System', made in October at the invitation of the Australian Treasurer, presented the case for introducing trans-Tasman mutual recognition of imputation and franking credits.
It concluded that establishing mutual recognition would benefit both Australia and New Zealand through greater trans-Tasman investment efficiency and increased product market competition.
It would also be an important step toward both governments' shared goal of having a Single Economic Market.
Submissions on last year's discussion document on whether the law should allow limited streaming of imputation credits to those who can use them and whether it should allow refunds of credits for charities and other tax-exempt entities are still under consideration by policy officials.
They are expected to report on submissions by mid-year.
What emerges from the Australian review is likely to have a major influence on how our imputation review proceeds.
If mutual recognition of imputation and franking credits does proceed, we should aim to make our anti-streaming rules as compatible as possible.
Tax Working Group
As announced last week, the Government will also be following with interest ideas that emerge from the new Tax Working Group, which will be co-ordinated by Victoria University's Centre for Accounting.
The working group is made up of invited private sector and academic experts, as well as tax policy officials.
They will meet regularly between June and November to consider medium-term policy options for the tax system.
In its meetings the working group will consider papers prepared by officials or commissioned from other tax experts, looking at the pros and cons of various policy options.
It will look at areas such as the fiscal framework, the structure of personal income tax, corporate tax, GST, and the integrity of the tax system.
Regular updates on the group's work will be publicly available from a number of sources.
The working group will not make policy recommendations to government and it is not intended to be representational.
But it will provide an important forum for informed discussion of medium-term tax policy that can feed into advice to Ministers and wider public debates on tax policy.
The work of the group will culminate in a major public conference in December, to be hosted by Victoria University.
Income splitting, or the idea of allowing families with children to split their income for income tax purposes, also has high priority on the work programme.
The Confidence and Supply Agreement between National and UnitedFuture includes support to first reading stage in Parliament for a bill giving effect to the party's income splitting policy.
The bill will be introduced next year.
Making NZ more competitive internationally
A major group of inter-related projects on the work programme is aimed at making New Zealand more competitive in world markets and will have a clear impact on investment into and within New Zealand.
Those projects include the second stage of the continuing reform of our international tax rules, which will consider the extension of the active income exemption to non-portfolio foreign investment funds, branches of New Zealand companies, and financial institutions.
Also under consideration is the introduction of special rules to extend the active income exemption to certain controlled foreign companies and to non-portfolio foreign investment funds that would not otherwise qualify.
In a similar vein, the Government is also looking at the advisability of introducing an exemption from the approved issuer levy and non-resident withholding tax for New Zealand bonds issued to non-residents.
Such an exemption was raised at February's Job Summit as a way of making bond issues and borrowing from overseas banks easier, thus reducing the cost to New Zealand firms of accessing funds.
We are also examining the provision of a relieving mechanism for non-resident withholding tax on dividends paid to shareholders if those dividends represent distributions of active offshore income.
We plan to canvass these ideas by means of consultative documents to be released later this year.
Continuation of work on matters relating to the charitable, community and voluntary sectors are a high priority for me, as Minister of Revenue.
This work includes consideration of further tax incentives to encourage charitable giving, having a fresh look at the criteria and process for approving overseas donee organisations for tax purposes, and as part of the imputation project, considering whether imputation credits should be refundable to charities.
There are a number of options for further tax incentives to promote charitable giving, all of which have been well received by the charitable sector, particularly in light of the economic environment and the negative impact it is having on levels of philanthropy and donations.
One option is to have a scheme along the lines of the United Kingdom's gift aid scheme, which enables charities to claim the tax benefits of charitable donations, rather than the donor claiming them.
Another option is to provide tax incentives for non-monetary donations to charities.
Some of these options would present problems for our tax system, so careful consideration is needed to ascertain which of them would best encourage giving to charities while having regard to the need for financial prudence and restraint in the current environment.
The child support system, especially the area of shared care, is also a high priority for me.
That work, assisted by work being done by the Families Commission, will involve seeking a better understanding of patterns of caring for children in the event of a parental separation.
The cost of caring for a child when parents separate is also an important issue for consideration.
This should help towards a better recognition of shared care in the child support formula, a very difficult and vexatious subject for those individuals involved.
For that, we will again need to look at developments in Australia, which now has an approach that takes into account both parents' income and accepts a lower level of shared care than our formula does.
I anticipate releasing a discussion document on these aspects of the child support system later in the year.
Any emerging recommendations on the child support formula will also have to take into account the work that is being done to modernise Inland Revenue systems.
Modernising IR systems
The Government is considering ways of helping Inland Revenue to improve its ageing administrative systems and has made that a priority on the tax policy work programme, given that an efficient administration is essential to the success of the tax system.
A very big challenge to the efficiency of our tax administration has arisen over the last decade or so.
It has arisen from the strain placed on the tax administration by the addition of an ever increasing number of social policy programmes that are administered through the tax system - programmes such as student loans, Working for Families tax credits, child support and KiwiSaver.
Over recent years, systems designed for tax collection have been progressively adapted to cope with these and other social policy programmes.
Over time, this has resulted in greater systems complexity, loss of agility and efficiency, and greater cost of administration.
A good tax system requires good tax administration and good policy.
It is now more important than ever that tax policy and administration deliver a system which is as efficient as possible in raising the revenue the Government needs to meet its funding requirements.
The focus of the improvements will be on protecting the integrity of the tax system, reducing administrative and compliance costs, delivering better services, and enabling Inland Revenue to deliver new Government initiatives faster and more effectively.
At this point I would like to publicly acknowledge the work of the Inland Revenue Department in coping so well with all the changes and new policies that successive governments have introduced.
However, we cannot rely on more of the same in the future. Further strain on tax systems from future policy changes could increase organisational risk and, consequently, risk to tax revenues.
The Government will be looking at key areas of systems strain and the underlying legislative framework.
Take student loans, for example.
With over half a million borrowers and a nominal value of $9.6 billion, the student loan scheme represents a significant Crown asset that has to be managed in an efficient and cost-effective manner.
On the other hand, Inland Revenue's current student loan systems are unnecessarily complex, largely because they are modelled on tax rules.
For example, the income tax system is an annual concept, while a loan does not naturally fit into such a cycle.
We will also be looking at the PAYE system, which is an important element of any potential change.
It is the key vehicle through which Inland Revenue interacts with employers in the collection of employee information and payments relating to PAYE and social policy programmes such as student loans, KiwiSaver and child support.
It is all inter-related.
Modernising the infrastructure to deliver PAYE would enhance the benefits of improved administrative systems for student loans and Working for Families tax credits.
It would have wider benefits as well, particularly in relation to income tax, KiwiSaver and child support.
I have gone into detail in these examples to give you some understanding of why there is an urgent need to modernise several Inland Revenue systems.
We are still considering several potential solutions to these systems problems, so it is too early to make detailed announcements.
I understand that your group is particularly interested in the progress of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which was introduced in July last year.
It was one of 78 bills before Parliament that lapsed when the House rose for the election, and it was re-instated by the new Parliament after the election.
Still under consideration by Parliament's Finance and Expenditure Committee, that bill introduces a number of major reforms, including changing the way that the life insurance business is taxed, by introducing an integrated framework of changes that include taxing actual term insurance profits.
Of major importance in the bill is the first stage of the reform of New Zealand's international tax rules, a fundamental change in the way that we tax the offshore active income of our controlled foreign companies.
The cornerstone of the reform is the introduction of a tax exemption for active income from the offshore operation of New Zealand-based businesses, which is part of the bill.
That will bring our tax rules on offshore income into line with the practice in other countries and help New Zealand-based business to compete more effectively in foreign markets by freeing them from a tax cost that their competitors in other countries do not face.
Other reforms in the same bill include clarification of the law relating to employee relocation and overtime meal allowances, the introduction of a voluntary payroll giving system whereby employees can have their charitable donations deducted from their pay by employers, and changes to strengthen the definitions of "associated persons" in income tax law.
All this is still under consideration by the select committee.
Given the time that has passed since the introduction of this very large bill, I am in favour of deferring the proposed application dates of many of the measures in the bill.
As originally proposed, many of the application dates appear to be unrealistic for the affected taxpayers, who have to prepare their systems for, and work in accordance with, complex tax reforms that have yet to be enacted.
Changing a bill before Parliament is not a matter of a Minister - or anyone else - simply announcing that a change in the proposed legislation is will be made.
The correct process is for the select committee that is considering the bill to make recommendations to Parliament about changes it believes should be made, and Parliament then decides.
The select committee makes its recommendations after it has considered submissions and what officials recommend in regard to points raised in submissions.
For this reason, I wrote to the chairman of the Finance and Expenditure, Craig Foss, outlining my concerns about the proposed application dates in several cases, and asking the committee to give serious consideration to deferring many of them.
I know that the committee is concerned about the application dates because Mr Foss contacted me late last year to inform me that the committee had asked officials to look into the implications of deferral for several of the proposed measures.
The application dates of most concern are those for the reforms relating to our international tax rules, the taxation of the life insurance business, definitions of "associated persons" in the Income Tax Act, and payroll giving for charitable donations.
I announced my recommended deferrals in March to let affected businesses know we are aware there is a problem, although no-one can give absolute certainty at this point, for reasons I have explained.
For the international tax changes, I have recommended that the application date remain at the 2009-10 income year only for taxpayers who have balance dates on or after 30 June, the date the bill is expected to be reported back to Parliament.
For all others, the application date would be the 2010-11 income year.
For the reform of the rules on taxing the life insurance business, I have recommended that the application date of the new rules be deferred until a date to be determined following further discussion with the industry.
For the changes to the associated person rules, I have recommended a one-year deferment, to the 2010-11 income year, except for the land provisions, which would be deferred from 1 April 2009 to the date of enactment.
For payroll giving, a change keenly awaited by charities but requiring changes to employers' payroll systems, I have recommended that the application date be deferred from 1 April 2009 to three months after enactment.
I have also recommended deferrals of the application dates of a number of other, smaller changes, many of which are taxpayer-friendly or which simply clarify the rules.
For example, changes to rules on provisional tax pooling would be deferred from 1 April to the date of enactment.
The bill is not expected to pass before August.
I will conclude my remarks today by thanking you again for the opportunity to meet with you and to discuss tax matters that are important to us all.
I acknowledge the excellent contribution that your profession makes to the operation of the tax system and the practical experience that NZICA brings to the policy consultation process.