Address NZ Chambers of Commerce
10am, Thursday, 16 September 2010
Good morning and thank you for the invitation to address your Conference today.
I am especially pleased to be speaking here today given your conference theme of 'Creating opportunities'.
I am delighted that Chambers of Commerce are looking to the future now and to the opportunities we face as we emerge from recession.
However, before we start that I must acknowledge the impact of the Canterbury earthquake and its aftermath.
Inland Revenue is involved in dealing with just one aspect of the wider consequences of the earthquake.
Issues such as destroyed records, financial hardship and the late payment of tax all need to be addressed, as do a host of technical issues that the Department is working on.
Of course, I appreciate that these are near the bottom of the list of things Canterbury people will be focusing on right now, and understandably so, but it is nevertheless important that Inland Revenue is ready to deal with people effectively and fairly when the appropriate time comes.
In particular, I have been extremely impressed with how swiftly the Canterbury Employers' Chamber got back on its feet and swung into action supporting the community.
Our thoughts are with Peter Townsend and his team and with the entire Canterbury region.
I certainly applaud their indomitable spirit in the face of adversity as they rebuild Canterbury's future.
But then as a Cantabrian by birth and upbringing, albeit doing a long OE in Wellington, I am not surprised.
The theme of your conference - creating opportunities - seems particularly pertinent to you today.
This Government is very much about opportunities.
We see our role as not so much to create the opportunities, but to provide an environment where New Zealanders have the chance to reach their potential.
Part of that is creating a good business and economic environment.
Policy drivers for growth
The Government has agreed on six policy drivers aimed at lifting New Zealand's long-run growth rate and reducing the economy's vulnerability to external shocks.
1. a better regulatory environment for business
2. a better smarter public sector
3. support for science, innovation and trade
4. a focus on higher skills for our labour force
5. productive infrastructure investment, and
6. a fair and efficient tax system
This year's Budget was designed to boost savings, investment and productivity.
At the same time, work will continue on protecting and maintaining the integrity of the tax system, while ensuring that our tax system is as simple as possible and is internationally competitive.
We know that for business to flourish we need to remove as many bureaucratic impediments as possible and I am pleased to be able to report significant progress in this regard.
The tax policy work programme is most focused on delivering a fair and efficient tax system and a better and smarter public sector.
The Government priorities in the tax area are:
- implementing the measures announced in the Budget
- changing the way Inland Revenue operates through the Transform IR programme
- international tax reform, and
- the work of the recently announced Savings Working Group.
I will start with this year's Budget.
The Budget was perhaps the most comprehensive shake-up of the tax system in the last twenty years and introduced a number of significant changes, including lower tax rates for individuals, businesses and savers, a rise in the GST rate, and changes to the investment property rules.
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.
The shift away from income tax and towards GST will ensure that ordinary New Zealanders see an increase in their take-home pay and will encourage them to save for retirement.
Recently I was pleased to be able to announce we were bringing forward the repeal of a tax.
The Budget had already signalled the repeal of fund withdrawal tax.
What we did at the end of August was to hasten its departure following feedback from taxpayers.
Fund withdrawal tax is levied on certain superannuation funds and served a particular purpose, but it was obsolete and past its use by date.
Prolonging its demise was simply imposing unwarranted compliance costs on taxpayers.
We have therefore repealed it and that will take effect from 1 April next year.
Repealing an unwarranted tax is a good thing for a government to do to stimulate the economy.
We are now, as I have previously announced, turning our attention gift duty.
As you know, I announced in June the Government's intention to repeal gift duty, subject to issues relating to creditor protection and social assistance eligibility being satisfactorily resolved.
Officials have been consulting widely on these aspects, and while final decisions are yet to be made, I remain hopeful our original objective can be achieved.
Other recent legislative amendments have included GST transitional arrangements to help ensure businesses are not unnecessarily impacted by the 1 October rise in GST.
These arrangements largely affect transactions that straddle the implementation date.
Certain successive supplies, such as insurance, finance leases and lay-by contracts that straddle the 1 October date will be able to continue at the 12.5% rate for a transitional period to reduce compliance costs.
The transitional periods will vary for the type of supply concerned
There are also measures to better align the GST time of supply rules with business practices.
A further provision extends the remission of late payment penalties and the associated interest for GST returns to cover the period immediately before 1 October.
These various GST measures were the result of the work of the GST Advisory Panel which I announced in May, and which has proven itself very useful in identifying issues that the business community faced with the increase in the GST rate.
At the time of the Budget, we knew there would be some transitional issues, but in the context of Budget secrecy, we were not entirely sure what they would be.
I think the process we adopted has allowed us to identify and fix those issues, and I see it as indicative of the pragmatic, solution-focused approach that this Government takes.
On a related matter, the Budget proposals on GST phoenix schemes are in legislation currently before Parliament.
Meanwhile, submissions have just closed on another piece of work flowing out of the Budget - two sets of suggested changes to remove uncertainty around depreciation of assets, including the fit-out of non-residential buildings and depreciation loading for certain assets acquired before Budget 2010.
The officials' issues paper suggests an option to clarify the law on when non-residential fit-outs can be depreciated separately from the building.
The second clarification relates to the 'grandparenting' of depreciation-loading for certain assets acquired before Budget 2010 and it is suggested that depreciation-loading should apply when there was a commitment to purchase or construct an asset prior to 20 May 2010.
Officials will report to the Minister of Finance and me with their final policy proposals in due course.
As I have said, the Government intends to have the necessary clarifications in law before 1 April 2011.
As part of Budget 2010, the Government announced that it would replace the current qualifying company rules for closely held companies with a new set of rules to make qualifying companies and loss attributing qualifying companies (LAQCs) flow-through entities for income tax purposes.
This would provide a tax treatment similar to that of limited partnerships and so income would be taxed and losses deducted at a shareholder's marginal tax rate.
The purpose of this reform is to address a number of problems with the current rules which undermine the integrity of the tax system.
These problems include the abuse of the qualifying company regime particularly in the property area.
There was also concern that there may be arbitrage opportunities resulting from qualifying company profits being taxed at the company rate while the losses of LAQCs are allowed as a deduction from a shareholder's annual gross income, which may be taxed at a higher rate.
An issues paper seeking public comment on the implementation and transition details of moving LAQCs and qualifying companies to a flow-through treatment for income tax purposes was released in May.
Consultation on these proposals has proved very helpful.
One area of particular concern that has been raised is whether qualifying companies can continue to operate in their current form, but without the loss attribution provisions.
Feedback has been that small enterprises like the qualifying companies approach, and do not want to move to a full flow-through treatment.
In essence whereas there is considerable support for the Governments moves against LAQCs, the message we have received is that the QC regime [other than LAQCs] has not been abused and should be left in its present form thus avoiding significant compliance costs.
I am sympathetic to the points raised about existing qualifying companies, but on the other hand, I am aware of officials' concerns about the proliferation of the number of statutory tax rules by keeping the qualifying company rules without loss attribution, while adding a flow-through company tax regime to it.
The Government is currently considering its response to these submissions, and we hope to release final proposals and the consequential draft legislation for external comment shortly.
Social Assistance integrity
Another very important aspect of the tax system is its administration of social assistance programmes.
Such social assistance programmes fulfil a very real function for our society, but people should not receive different levels of assistance according to how they structure their affairs or the manner in which they receive income to live on.
This is inequitable and inconsistent with social assistance objectives.
There are many much more worthy uses for taxpayer funds.
Therefore, as part of Budget 2010, the Government announced that it would reform the definition of income used for determining entitlements to certain social assistance programmes, namely, Working for Families tax credits, student allowances and community services cards.
The Government provides a range of programmes to ensure that people have a minimum standard of living, and have access to health and education and identifies those people in genuine need.
Entitlements to these three programmes are based on the definition of "taxable income" in the Income Tax Act 2007 therefore, how income is defined is crucial to the proper targeting of these social assistance programmes.
The purpose of the reforms is to improve the integrity of these social assistance programmes.
An officials' issues paper was released on 30 August and submissions close on 24 September.
On all these Budget-related matters, we have as far as possible, instituted processes for identifying implementation issues that could cause problems, especially for small businesses.
We have demonstrated a pragmatic and sensible approach for fixing these in a way that does not undermine the policy announced in the Budget.
It is in the spirit of being sensible and pragmatic, that we are undertaking the Transform IR programme.
To make the tax system more efficient, we need to help people more easily manage their tax affair and, remove inequalities.
And in achieving all of that, we need to maintain the integrity of the system.
The Government recently consulted the public 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.
Essentially, this would help reduce administrative and compliance costs, with Inland Revenue moving 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 allow for the provision of information to Inland Revenue on a payday basis.
The key proposal is to help people more easily manage their own tax affairs and entitlements online through their own secure area on Inland Revenue's website - like internet banking.
If adopted, these proposals could do away with the millions of letters, forms and booklets which are printed, filled out, and posted today.
This move to online transactions will also apply to businesses - the proposal is that business' accounting software will be able to take care of routine tax obligations without the need to fill in separate forms.
There are some ideas around the annual square-up process.
At the moment, people who think they might get a refund can check online, then request a personal tax summary to confirm they have a refund - which is paid into their bank account - or a tax bill they have to pay.
Under the proposal, the risk of errors in PAYE deducted each payday would be greatly reduced, so for many people there would be no end-of-year square-up and refund, but no tax bill either.
People were also asked for views on proposals to share some information with other government departments - with appropriate safeguards - to enable cheaper, more efficient services for the customer.
Consultation closed at the end of July and there was considerable public interest in the proposals.
Officials are working through the several hundred submissions made both in writing and - in this case most appropriately - through the online forum.
I hope to make further announcements about this important area of development, and the other matters included in the consultation, over the coming months.
We are also looking beyond our borders for opportunities to remove obstacles and want New Zealand businesses to be competitive abroad as well as at home.
International Tax Reform
The international tax rules were fundamentally reformed last year as new exemptions were put in place for active income earned through offshore subsidiaries and for foreign dividends received by New Zealand companies.
These reforms will help New Zealand-based businesses to compete more effectively in foreign markets by freeing them from tax and compliance costs that similar companies in other countries do not face.
In particular, last year's changes brought New Zealand's rules more into line with Australia's.
Of course, not all New Zealand businesses that are looking to expand internationally will want to do so through subsidiaries.
In coming months, legislation will therefore be introduced to extend the active income exemption from foreign subsidiaries to other foreign associates in which a resident has a significant interest, such as joint ventures.
Subsequent extensions of the active income exemption are planned for offshore branches of resident companies, and for financial institutions with active offshore operations.
At the same time as the reform of domestic legislation has been in full swing, international tax agreement work has been progressing well.
Inland Revenue's negotiating team has been very active.
New treaties with the US and Australia have recently reduced, and in some cases eliminated, non-resident withholding tax on dividends, interest and royalties.
Further negotiations will focus on securing similar reductions in withholding rates with other treaty partners.
Negotiations are now under way with the United Kingdom and Canada, with more to follow.
Another significant piece of work going on in the international tax area, focusing on the attractiveness of New Zealand to foreign investors, is a measure to remove withholding tax on interest paid to non-residents in some circumstances.
Consultation on this measure is largely complete and legislation is likely to be introduced before the end of the year.
This measure will make it easier for New Zealand businesses to seek offshore funding by means of a public bond issue.
The Government also released a consultation document earlier this year floating the idea of a tax exemption for foreign income earned by non-resident investors in a PIE, which brings me to savings and investment.
Savings Working Group
Over the longer term, part of the Government's economic strategy is to move away from unsustainable reliance on credit.
Until we address that, our economy will continue to be vulnerable.
Over the next four years, New Zealand's net debt (private and public sector) is projected to grow to more than our income.
That is obviously concerning.
Where New Zealanders are making investments, we want investment decisions to be driven by the quality of the particular investments, not just the tax advantages that may derive from them.
The bottom line is that we have tended to spend more than we earn, and when we invest, we have favoured property.
Savings and capital formation are essential parts of any economy and we need to create a favourable economic environment for that.
The Savings Work Group launched last month will look at the impact of the tax system, particularly the taxation of income from savings and investment on the level and composition of national savings and investment decisions.
So how do you encourage a national interest in savings?
All options have to be considered.
The recent Henry Review in Australia set out how Australia might reduce tax on capital and increase tax on labour income.
This is something we clearly need to investigate for New Zealand and the Savings Working Group will therefore consider the case for moving to a dual income tax system, where labour and savings and investment income might be taxed at different rates.
It will also look at indexation or part indexation of the tax system so that real, rather than nominal, savings and investment income is taxed.
The Group's scope will include:
- The role of Government savings as part of New Zealand's overall savings picture, including long-term savings/debt targets.
- The impact of the tax system on the level and composition of national savings and investment decisions.
- The role of KiwiSaver in improving national savings.
The Working Group will hold a series of six meetings, before a final working session in December, with interim papers to be made public along the way.
The Working Group is scheduled to report to the Minister of Finance with options for improved national savings in January next year.
The work I have discussed so far apply generally to businesses, but of course the Government aims to provide opportunities for all to get ahead.
When families break up, the best solution is always for parents to try and work out their own arrangements for the ongoing financial support for their children.
It is by far best for parents to reach private agreements on their financial contributions and care arrangements for their children, without State intervention.
However for some, this cannot be avoided and in 1992, the Child Support scheme was introduced.
For the sake of people in such a situation, it is up to us to ensure that the scheme is run as efficiently and fairly as possible.
The common consensus - and I agree with it - is that there are too many occasions when the scheme is not fair; too many instances where people are rightly aggrieved but its outcomes, be they paying parents or custodial parents.
The current scheme is outdated and does not take into account changing family dynamics.
The Government needs to ensure that the best incentives to pay are in place so that child support payments are made on time and voluntarily.
I do believe this is much more achievable when people feel that that system is fair and truly there for the benefit of their children.
We are also concerned about the level of debt generated.
With fines and penalties, it now stands at just under $2 billion.
Earlier this month I released a discussion document outlining proposals for addressing these issues and re-shaping the Child Support scheme.
Consultation closes on 29 October.
It has already attracted a huge level of public interest, confirming to me the fact that reform in this area was overdue.
Another discussion document I released recently deals with Income Sharing for parents of dependent children.
You may well be aware that I have promoted this for many years as the leader of UnitedFuture, and I am now driving it as Revenue Minister.
Essentially Income Sharing would allow couples who decide to have one parent at home looking after the children do so without the full financial sacrifice they have to make today.
It is a decision that really costs them, and we want to do something to ease that cost and recognise the importance of the choice they are making in a practical way.
And that practical way is that up to 310,000 New Zealand families could benefit by up to $9,000 a year, making one of them spending more time raising their children a viable choice.
And that in a nutshell is what it is about - choice.
Families who choose to have one parent stay at home to raise their children should not be disadvantaged for doing so.
There are families where parents would prefer to have one parent at home to raise their children but are compelled instead to both be at work because of financial reasons, this Bill may give those families greater options.
I have heard a lot of criticism of the proposal which is largely misplaced.
Some have said it is a taxpayer subsidy to the better-off families - the Labour Party managed to go even further and insult every woman in New Zealand by dismissing it as a tax handout to the wives of rich law partners.
In fact, it is none of these.
It is allowing people to keep more of their household income, in recognition of the vital role both parents play in raising their children.
And they also have the choice whether they opt into the scheme or not.
I cannot understand how it can be acceptable for business partners to be able to share their incomes for tax purposes - but not acceptable in the case of arguably the most important business of all, the individual household.
The Income Sharing Bill will have its first reading next week and will be referred to a select committee for public submissions.
If it passes into law, it will come into effect in 2012.
Income sharing, like everything else I have been talking to you about is about a better future.
My overall message to you is that while the economic recovery may be cautious, the Government is working hard to establish a fertile ground to nurture that recovery.
And when recovery is better established, the work we are doing now will present New Zealand businesses and employers with the opportunities for a better future.
The people you represent in communities up and down New Zealand are a very important part of that future, and that is why it has been a pleasure to address you this morning.