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Inland Revenue

Tax Policy

PUBLISHED 23 July 2010

Minister's speech to NZICA on opening the Auckland branch

At the opening today of the Auckland branch of the New Zealand Institute of Chartered Accountants the Minister of Revenue's speech provided an update on the tax policy work programme.

Hon Peter Dunne
Minister of Revenue

Address at Official Opening of New Zealand Institute of chartered Accountants’ (NZICA) Auckland Branch

Parnell, Auckland, 3.45pm, Friday, 23 July 2010

Good afternoon. It is great to be here on this auspicious occasion - so thank you very much for inviting me to be part of it.

I want to acknowledge the kaumatua, the tangata whenua, the special guests and life members of the Institute who are here today.

I also want to place on record my appreciation, and that of my ministerial colleagues, to NZICA, and the Auckland branch in particular, for the significant contribution you make in so many areas of our country's economic activity.

I especially value the warm association and dialogue I have had with your Institute on taxation issues over many, many years, and I look forward to that continuing in the future.

Today you are looking forward expectantly to a new home for your Auckland branch and a new future for the New Zealand Institute of Chartered Accountants.

At the same time, New Zealand as a whole is contemplating a new economic future as we move out of recession.

I would like to take this opportunity to give you a quick update on how current tax policy work is progressing and what the Government is doing to build better economic prospects and social outcomes for New Zealand.

A large part of the work programme will, of necessity, focus on this year's Budget initiatives.

The Budget introduced a number of significant changes to our tax system including lower tax rates for individuals, businesses and savers, a rise in the GST rate, and changes to the investment property rules.

In addition to the measures in the bill, the Budget announced changes to reform the rules around loss attributing qualifying companies.

An important change, of course, was the alignment of the top personal tax rate with the trust tax rate at 33% to provide a greater incentive for saving and investment.

Aligning the company tax rate and the rate for savings vehicles, such as PIEs, will promote saving.

It also significantly improves the integrity and fairness of the tax system by removing the main tax advantage that could be gained by sheltering income in trusts.

As you know, the company tax rate and that applying to certain savings vehicles will drop to 28 cents in the dollar.

The company tax rate reduction is good news for business as it will make New Zealand a more competitive investment destination.

As a result of these far-reaching changes, we are reviewing the current tax policy work programme that was released in March last year and was revised last September.

The review is requiring hard choices to be made on what measures we can and should proceed with, given the Budget priorities and current resource and fiscal restraints.

The work programme is still under consideration by Ministers, but I am happy to talk to you about some of the more significant pieces of work that will be undertaken in the coming year.

We sought public comment earlier this year on how qualifying companies could be moved to a flow-through treatment for income tax purposes.

The Government's intention was to address a number of problems with the current loss attributing qualifying company rules which can undermine the integrity of the tax system.

The proposal was that the current qualifying company rules for closely held companies would be replaced with a new set of rules to treat qualifying companies as flow-through entities for income tax purposes, similar to limited partnerships.

A consequence of this would be that a company's income and losses would both be passed on to shareholders, so income would be taxed and losses deducted at a shareholder's marginal tax rate.

The Government is currently considering submissions made in respect of these proposals and will announce its decisions in this area shortly.

Inland Revenue also began public consultation on proposals to remove complexity from the tax system by reducing the use of paper forms in administering the tax system and increasing online services and technology.

As you know, we are also looking at reforming the PAYE and personal tax summary process (including the possible option of making PAYE a final tax for many) and introducing a new framework for sharing appropriate information with the necessary safeguards with other government agencies.

Under such an approach, to help reduce administrative and compliance costs, Inland Revenue would move to a greater emphasis on electronic interaction with taxpayers.

Businesses, employers and the non-profit sector would have software which takes care of routine PAYE compliance tasks, such as the need to separately file an employer monthly schedule by automatically communicating with Inland Revenue.

The software could have an option of providing information to Inland Revenue on a payday basis.

All these measures are aimed at promoting growth and building a tax system that is fair.

We also need to remove inequalities and protect the integrity of the system.

In this regard, let me say a word or two about the work of the Rewrite Advisory Panel.

As you are probably aware, the Rewrite Advisory Panel was established in 1995 to consider and advise on unintended changes in the law arising from the rewriting of the Income Tax Acts.

It has done this job exceptionally well.

Although rewrite issues continue to be the core role of the Panel's work, I see its role moving progressively to take on remedial issues.

This is why I announced earlier this year that the Panel would begin turning its attention to remedial items not arising from the Rewrite Project - to cover matters that are raised by tax practitioners or Inland Revenue with a view to remedial amendments to any of the Inland Revenue Acts.

This is a natural progression from the Panel's original purpose of addressing unintended legislative change to ensure ease of understanding, simplicity and administration of our tax law.

These same principles continue to apply as the Panel's focus turns to also include remedial items.

I am looking for a quick, efficient and useful process for dealing with remedial matters and I have already approached some key groups including NZICA seeking their input into what the priorities should be.

Because the scope of the proposal is potentially quite large, I have indicated that only issues on particular topics will be called for publicly - at least initially.

My expectation is also that any remedial issues would not relate to matters on the tax policy work programme.

Today, I am pleased to announce the first call for remedial items.

The areas that we seek your input are:

  • Available Subscribed Capital (ASC) on corporate reorganisation; and
  • beneficiary income of trusts.

These areas that relate to the capital of companies being reorganised and the treatment of income received by beneficiaries of trusts are important to the efficient functioning of the tax system.

Your submissions to the Panel on remedial items in these areas will help improve the tax system by making necessary running repairs and maintenance.

I encourage you to send submissions to the Rewrite Advisory Panel by 3 September.

On the work programme side you are probably aware of some of the higher profile subjects.

In October when GST rises to 15%, I am confident we will have done everything we can to ensure that the transition is seamless.

To a large part, this is due to the good work of the GST Advisory Panel, which I established under the chairmanship of Frank Owen after the Budget.

The Panel has taken a very activist approach to its task, and has already identified a number of issues arising for businesses as a result of the rate change that will require transitional amendments to the legislation.

Following discussion with the Minister of Finance, I will be recommending to the Cabinet changes to grandparent at the 12.5% rate health insurance contracts, general insurance contracts and finance leases that straddle the 1 October date for the rate change, subject to certain criteria.

I will also be recommending some more minor changes that will ensure that certain contracts which have either been fully invoiced and performed or, in some situations, fully paid but not fully performed remain at the 12.5% rate.

A further legislative measure relates to lay-by sales for which the 12.5% rate will apply to payments made before 1 October.

In all these cases legislative change will either address unmanageable compliance costs for affected businesses or provide much needed certainty.

I have asked officials in conjunction with the Advisory Panel to undertake limited consultation on the legislation once this is available to ensure that these objectives are met.

The changes the Panel has proposed to date have not yet been formally considered by the Cabinet, but as they are largely technical, I am very optimistic they will be supported.

The Panel is in place until the end of the year, and I would expect it to draw other matters of concern to our attention as and when they arise.

Another item out for consultation is the proposed changes to the disputes process which was in response to your joint submission with the New Zealand Law Society.

The proposed changes are largely administrative with some supporting legislative changes also required.

It benefits neither government nor taxpayers to have disputes rules that are fraught with arguments about the process rather than substantive ones.

So I urge you to go to the Inland Revenue's policy website, read the proposals and make a submission - consultation closes on 20 August.

International tax agreement work is progressing well and double tax agreements already negotiated are proving very beneficial for cross-border trade.

The current emphasis is on negotiating updates to our tax treaties with key trading and investment partners with a view to securing similar withholding tax rates on cross-border dividend and royalty payments to those secured in 2008 with the United States and in 2009 with Australia.

Negotiations are now under way with the United Kingdom and Canada, with more to follow.

In addition, a new tax treaty with Turkey was signed in April this year, and negotiations for a treaty with Hong Kong will begin in October.

The Taxation (Income-sharing Tax Credit) Bill, which arises from the National/UnitedFuture confidence and supply agreement, will allow a new tax credit for couples with dependent children.

It has now been finalised and will be introduced to the House shortly.

It is based on the idea that couples with dependent children share their incomes equally and pay tax based on half of the shared income.

The tax credit, proposed to take effect from 1 April 2012, will provide additional financial support for couples where one partner is on a higher tax rate than the other partner.

The tax credit will also ensure that different couples on the same level of combined income effectively pay the same combined amount of personal income tax, regardless of how much each partner earns.

The income-sharing tax credit is similar to the Working for Families tax credit and would share many of the same rules and requirements to help keep administration and compliance costs down.

Beyond matters such as these, we are making some serious choices.

As always, I appreciate any input you may offer in line with the good working relationship we enjoy with you.

Thank you very much and I now declare this building open.

My very best wishes for the future.