Address to Conferenz 5th Annual One Stop Update
Accountants in Practice Conference
10am, Intercontinental Hotel, Wellington
I am very pleased to speak to your conference today on developments in tax policy.
The Government's tax policy work programme, which was announced in March this year, and updated in September, has four broad themes.
- Better positioning New Zealand in the world economy.
- Responding effectively to the changing economic and fiscal environment.
- Maintaining tax revenue.
- Improving tax administrative systems, so that they can operate more effectively and deliver greater value for money.
These four, very broad themes cover just about everything on the government's tax policy work programme.
But before I go into specific policy projects that may be of interest to you I will turn for a moment to the influence of the fiscal and economic climate on tax policy, because, whatever else may be the case, the fiscal and economic climate will always be critical in setting tax policy.
When it was elected, late last year, the new Government faced an immediate challenge from the worldwide economic crisis.
As a small, open economy with high levels of external debt, New Zealand was especially exposed to the economic downturn, which in late 2008 threatened a re-run of the depression of the 1930s.
However, several months down the track, there is now growing confidence that such a scenario has been averted by the actions of governments throughout the world, including New Zealand's.
The position now seems to have stabilised.
But although there are positive signs, the world economy is still not robust, with the hangover from the turbulence likely to be with us for some time.
Since 2008 the New Zealand Government has gone from budget surpluses to deficits.
And the Treasury's post-election, medium-term fiscal projections are for budget deficits to remain until the 2016/17 year.
Even then we will return to a sustainable fiscal position only by fiscal drag moving the average worker on to the top personal marginal tax rate of 38 percent.
That is why the Government is committed to moving to an alignment of the top personal tax rate, company rate and trustee rate at a maximum of 30 percent as a desirable medium-term goal.
It just so happens that alignment has long been UnitedFuture's policy, so obviously it has my full support.
But moving towards such alignment while also achieving a sound fiscal position requires us to look again at the tax system in fundamental ways.
This examination is being done in conjunction with the Tax Working Group, which is being co-ordinated by Victoria University.
The working group is leading a debate on the medium-term direction of New Zealand's tax system.
In doing so it is drawing on the experiences of other countries and their tax systems.
Some other countries have capital gains taxes and land taxes.
One question for the working group whether there is a place for such taxes in the New Zealand tax mix.
This is a discussion we should and need to have, but encouraging the debate is not without its political difficulties.
Despite what you may have heard from the media, the Government has made no decisions on the future tax mix.
What is more, the working group itself has not yet reached a final position on the many options, let alone presented it to the Government.
The Government is also closely monitoring the progress of Australia's comprehensive review of its tax system, which is chaired by Dr Ken Henry and is expected to report in December.
Tax developments in Australia, our closest economic partner, are of special importance to us, given our economic interaction and the fact that about 55 percent of foreign direct investment into New Zealand is from Australia.
New Zealand's submission to the Henry review, made in October last year at the invitation of the Australian Treasurer, presented the case for introducing trans-Tasman mutual recognition of imputation and franking credits.
I believe that mutual recognition is essential if we are to have a truly Single Economic Market, while retaining our respective imputation systems.
We have put our own review of aspects of our imputation system on hold until we know the outcome of the review.
Regardless of what results from the review, there will doubtless be important tax consequences for New Zealand.
All this is a reminder of how important it is to ensure our tax system remains competitive in a changing world.
It is also a key focus of the Tax Working Group.
In the meantime, we have made major progress in the reform of our international tax rules.
The taxation bill that passed its final stages in Parliament in September removed tax on active income earned through offshore subsidiaries and on foreign dividends received by New Zealand parent companies.
The idea behind this far-reaching reform is to help New Zealand grow its own internationally competitive businesses.
That will not happen if our businesses face tax disadvantages they would not face if they shifted to Australia or somewhere else.
We have now moved our rules into line with Australia's, removing a major disadvantage for our businesses.
The next stage in the reform will be to take the policies we have now legislated for and apply them as appropriate, not just to subsidiaries but also to branches, joint ventures and other significant offshore investments.
A discussion document with suggestions on how the active income exemption could apply to significant interests in foreign investment funds will be released within the next few months, while rules for branches and financial CFCs will be developed next year.
To turn briefly to our double tax agreements with other countries, withholding tax on cross-border income has been subject to increasing international pressures.
Over the last few years, many other countries have been progressively reducing their withholding tax rates on cross-border income flows, which has put pressure on New Zealand to do the same.
Australia has been reducing withholding taxes in its major treaties over the last ten years.
New Zealand has now developed a new double tax agreement strategy to reduce withholding tax rates with our major trading partners.
The idea is to reduce tax barriers to New Zealand businesses investing offshore and to the repatriation of profits when that investment takes place.
We have recently done that in new or updated DTAs with Australia and the United States, and we are looking forward to doing the same thing with our other major trading partners.
Re-negotiation of our DTA with Canada will begin in November, and re-negotiation of our DTA with the United Kingdom will begin in February.
I would like to turn now to developments in a number of other projects on our work programme that you may be interested in.
The Government is soon to embark on a review of the scope of gift duty.
Gift duty serves to protect against the use of so-called "gifts" for purposes of income tax avoidance, sheltering assets from creditors or spouses, and avoiding obligations such as paying child support.
Over the past year or so there have been repeated requests for the Estate and Gift Duties Act to be amended to exempt certain gifts from gift duty.
In considering those requests, it became apparent that the current exemptions from gift duty that are set out in law are fairly ad hoc, and there appears to be no coherent framework to determining which exemptions should be granted.
This leads to some undesirable inconsistencies – for example, gifts to some central and local government entities, such as Te Papa, are exempt from gift duty, whereas gifts to others, such as the Auckland Art Gallery, are not.
Clearly, the policy needs sorting out, and just how this could be done will be the subject of consultation early next year that will give interested parties the opportunity to have their say.
A tax bill to be introduced shortly will include legislation that allows transfers of retirement savings between certain Australian superannuation funds and New Zealand KiwiSaver funds.
That is good news for people who have retirement savings in both Australia and New Zealand, as many people have, because they will be able to consolidate them into one account in their current country of residence.
The bill is expected to be passed by the middle of next year.
The portability arrangement will take effect two months after both countries have enacted the necessary legislation.
Income splitting, or allowing families with children to split their incomes for tax purposes, thereby reducing their overall tax liability, also remains an area of interest for me.
Indeed, the post-election Confidence and Supply Agreement between my party, UnitedFuture, and National includes support to the first reading in Parliament for a bill giving effect to my party's income splitting policy.
The idea was first floated in a discussion document published in April last year, to which there was a good response.
That initial consultation is to be followed up by an officials' issues paper, planned for release by the end of this year, seeking submissions on the detailed design of the proposal.
The forthcoming tax bill will also introduce some refinements to the KiwiSaver scheme, including more coherent policy for savers under 18.
The KiwiSaver Act does not prescribe who can contract with a provider on behalf of people under 18.
It is at the discretion of the provider whether or not an application is accepted.
Consequently, there have been complaints from parents, guardians and children themselves.
To provide certainty and clarity, the bill will introduce a new set of rules to prescribe how young savers can enrol in KiwiSaver.
One of the main changes is that those under the age of 16 may not enrol themselves, but must be enrolled by their legal guardians.
The final big theme I want to address today is the need for a more efficient and effective public service as reflected in the Inland Revenue Department, my area of responsibility.
We cannot achieve a world-class, internationally competitive tax system by policy measures alone.
We also need a first-class tax administration that collects revenue and delivers services with speed and certainty.
In the time since I was chairman of the Finance and Expenditure Committee's Inquiry into Inland Revenue, back in 1999, I have been impressed with the improvements the department has made.
There is, however, still room for improvement, especially at a time when the government is pushing to ensure that we get increasing value for money from the public service as a whole.
Greater efficiency will not be achieved by increased funding for the public service – there is simply no money for that.
The public service has to think and act smarter – just as the private sector has to do.
With that in mind, Inland Revenue is embarking upon a major transformation exercise.
It needs to move away from the technology and management style of the 1980s, when its computer system, FIRST, system was built, to a model suited to this century.
That will mean making increasing use of e-business tools and the internet, tools that did not exist in the 1980s.
I will illustrate this point with an example I have used on a number of occasions, because it is a very good example.
Each working day Inland Revenue posts, on average, over 100,000 envelopes containing various pieces of correspondence.
That is over half a million letters a week, and over 25 million letters a year.
It is an impressive amount of mail for a population of a little over four million people.
Inland Revenue is aware that it needs to cut that mail dramatically.
Streamlining the system will require some policy and legislative changes, which the government will back.
We need to if we want to have a 21st century tax administration.
The first step in the modernisation process is to simplify the administration of student loan repayments.
The idea is to move away from the time-consuming paper-based management of loan repayments to electronic management and communication.
A bill giving effect to the student loan changes is planned for early next year.
The next step in the transformation process will be to look at what can be done with PAYE and the personal tax summary systems.
These are early days yet in planning the next stages in the modernisation of the tax administration, and detailed proposals have yet to be developed, much less agreed to by Cabinet.
There will of course be a lot of consultation with affected taxpayers, tax advisors, and professional bodies.
To conclude, I trust this brief update has given you a glimpse an idea of where the Government is in terms of tax policy, and where we are going over the next year or so.
Thank you and I wish you all the best for your conference.