Address to the International Fiscal Association Conference
Holiday Inn, Wellington
9am, Friday 11 March 2011
Good morning and thank you for inviting me here today.
When I addressed your conference last year, the Victoria University Tax Working Group had just reported back and their recommendations were being considered by the Government, as part of last year’s Budget process.
Clearly much has happened since then.
Front of mind for all of us, of course, is the devastation in Christchurch, with the huge loss of life, injuries and appalling damage to property, the infrastructure and their local economy, the people of that great city, and ultimately the country as a whole have had to sustain..
The Prime Minister has already released details of the Government’s initial response to the quake, but bluntly the scale of the disaster means more money has to be found to make good Christchurch’s recovery as a leading, dynamic, vibrant, prosperous city, as it was a few short weeks ago.
In a wider sense the earthquake emphasises once again the need for New Zealand to build up its capital in order to be able to recover from such crises.
The Prime Minister has already announced that the central focus of the 2011 Budget will be savings and investment.
Last year’s Budget measures were the most significant tax reform in New Zealand for over twenty years, shifting the weight of taxation from income to consumption.
That Budget contained substantive tax measures to improve the incentives for efficient savings and investment, while maintaining the integrity of the tax system including:
- Lowering tax rates for individuals and increasing the GST rate
Lower personal tax rates encourage individuals to work, invest and save, increasing wealth and productivity.
The GST rate increase funded a large chunk of the income tax decreases so that they were implemented in a fiscally responsible manner.
- Company tax rate reduction to 28%
With more capital goods, labour is more productive so this encourages productivity and growth.
It will also ensure that we remain competitive internationally.
- Changes to the taxation of property
This was a key component of the Budget package.
It will reduce tax biases in favour of property investment while it also helped pay for the tax cuts.
Research indicated that on average, buildings were not in fact depreciating over the period measured and the Tax Working Group had expressed concerns that the residential rental sector was not paying its fair share of tax.
- Lower PIE tax rates
Budget 2010 also reduced the top PIE tax rate 30% to 28% as well as reducing the lower PIE tax rates to align with the new lower personal tax rates.
This will boost returns to KiwiSaver investments and other long-term savings.
- Greater integrity and fairness
The Budget measures also significantly improved the integrity and fairness of the tax system by removing the tax advantage that could be gained by sheltering income in trusts.
The top tax rate for individuals is now the same as the trust tax rate.
This year’s Budget will build on all these features.
Savings Working Group
In January this year, the Savings Working Group issued its report.
While that was not specifically a review of the tax system, it was no surprise that a number of its comments and recommendations focused on tax issues.
It raised concerns about New Zealand's high level of indebtedness and vulnerability to financial shocks.
It examined measures which might reduce vulnerabilities to shocks and which might improve the allocation of savings.
The report recommended that the Government consider a large number of possible changes, including indexing the tax system for inflation or extending PIE arrangements so that there is a 5 or 10 percentage point reduction for all investors into PIEs below their normal marginal tax rates.
It also suggested extending these low PIE rates to interest and dividends more generally.
The report also set out a number of possible changes to KiwiSaver including auto enrolment of all employees who are not currently in KiwiSaver, reducing the starting age to 16 and increasing the default contribution rate.
A major theme of the Savings Working Group report was the need for the Government to improve its own balance sheet faster which severely limits the scope for major tax giveaways in the future
The suggested direction of change is for improving rather than reducing tax collections.
The measures suggested by the Savings Working Group are among those being considered by the Government in the run up to the next Budget with the objective of increasing national savings so as to reduce our over reliance on off-shore capital that should in turn allow for lower interest rates and therefore build faster, ongoing economic growth.
Taxation reform therefore has been and continues to be, central to policy debates in New Zealand.
The tax reform process
New Zealand, of course, has not been alone in this.
The past couple of years have also been a period of high activity in the taxation area internationally.
Notably we have had the Mirrlees Review in the United Kingdom and the Henry Review in Australia.
Given this strong focus on taxation reform, I want to take this opportunity to reflect on taxation reform and the process of taxation reform in New Zealand.
Most tax professionals would trace the beginnings of modern New Zealand tax reform to the Ross Committee which was established in 1966 and reported back in 1967.
It made about 120 recommendations, but its key recommendations were to:
- Reduce reliance on direct income tax and put more weight on indirect consumption taxes.
- Remove holes in the tax base that were being exploited, in particular, that fringe benefits of employees be taxed.
- Generally reduce income tax rates.
They have a familiar ring, but they were not really implemented until 1984 to 1986 – almost twenty years later.
A most sedate pace by any measure!
Things move more quickly now.
Take the Victoria University of Wellington Tax Working Group.
The group reported in February and most of its recommendations were implemented in the May 2010 Budget.
The Tax Working Group, to my mind, demonstrates how successful the working group model can be.
Academics, practitioners, businesspeople and government officials came together to consider the direction of New Zealand’s tax system.
Their combined efforts not only provided invaluable advice to the Government, but also provided a catalyst for public debate on tax policy issues.
The open debates fostered by the Tax Working Group process went a long way to providing the necessary public acceptance that fundamental change to the tax system was necessary.
The Tax Working Group also provided the broad recipe for change – which was largely followed in Budget 2010.
This is generally achieved by selected businesspeople, private sector advisers and academics working closely together on various policy issues as part of a group.
As a tool of tax reform, using ‘working groups’ in the front-end of the policy-making process in this way was a very successful process and certainly helped the public to understand and appreciate the issues.
For me, a sterling example of this was the work done by the GST Advisory Panel.
In 1989, when GST was last raised, the timetable for making the change was very brisk – indeed a matter of just six weeks or so – with little public discussion or input.
By comparison, the last year’s increase in GST benefited from a more inclusive process and was a remarkably smooth process.
Owing to the Panel’s considerable efforts, transitional measures well targeted to meet specific concerns were implemented.
Other aspects of the Budget also benefited from an inclusive process where possible.
Unlike the 1960s when tax legislation was all introduced and passed on Budget night, key aspects of the Budget such as depreciation of building fit-out, changes to the qualifying companies rules to ensure that investors are taxed at the correct rate, and tightening the rules for social assistance programmes were all subject to a period of brief, but intense consultation.
Given the nature of the Budget package, consultation was necessarily limited.
The concepts however had been canvassed in the Tax Working Group process.
Feedback was also received on details and transitional issues which the Government acted on.
All around, it would be fair to say that the consultation processes improved the results.
This demonstrates how radically the tax reform process in New Zealand has changed since the 1960s and the time of the Ross Committee.
The Generic Tax Policy Process (GTPP) implemented in the 1990s, and to which the Government remains committed, ensures
We get more input earlier, which in the end this makes for better results.
Indeed, New Zealand is continually cited as a model for how tax reform should be undertaken.
We need to retain and protect this process and I can assure you that you will always have my support in doing so.
From my experience, the keys to success are:
- Officials and Ministers who actually listen to what the private sector is saying, and
- A private sector which focuses on the national good rather than just narrow sectoral interests
I acknowledge at this point that the International Fiscal Association has played a crucial part in the interplay between the private sector, officials and Ministers since the 1980s.
Indeed, these conferences are important in building the understanding and consensus that makes tax reform work in New Zealand.
Obviously we do not always agree on every matter but when we disagree, I think we always understand why and I hope we always respect each other’s views.
Returning to the Ross Report, the themes of that are still familiar today.
The basic principles of a good tax system were seen to be:
- Economic efficiency
- Certainty, and
- Low compliance and administration costs
Those principles remain relevant and the Tax Working Group listed them as:
- Efficiency and growth
- Equity and fairness
- Revenue integrity
- Fiscal cost
- Compliance and administration costs
While slightly expanded, these are fundamentally very similar.
As I have said earlier, the Ross report recommended moving away from taxing income to taxing spending.
In economic terms, this is a move towards taxing capital less and labour more.
The right balance between labour and capital taxation is probably the key tax policy issue that governments face.
It is probably the central issue raised by the Mirrlees Report and the Henry Review, which both favoured lower taxation of capital.
Our response to date has been the switch the emphasis from income tax to GST, which was central to the last Budget.
No doubt, however, it will remain a central issue of tax policy reform.
So too, no doubt will be the issue of taxing capital gains.
A capital gains tax has its adherents.
It was not supported by the Ross review, nor did it get the support of the Valabh, McLeod or the most recent Tax Working Group reviews.
My view is that the Inland Revenue got this right in its publicly available advice leading up to the last Budget.
While a capital gains tax has some theoretical justification, in practical terms, it is not a tax we want, and while there a still some diehards hanging on in woeful desperation for the day that a capital gains tax might be introduced, I say to them that they are going to end up extremely forlorn, and it is time to move on and find a new obsession.
The conclusions of a series of reviews of the New Zealand tax system were not wrong.
There are two differences between the Ross Report and the tax reform issues now that seem significant to me.
First, international tax reform received little mention by the Ross report.
It is now one of the central issues.
Along with taxes and growth and the transformation in the way that Inland Revenue operates, the international tax reform programme is one of the three key aspects of the tax policy work programme.
International tax reform
This year, with a review of the taxation of offshore branches of New Zealand companies, we continue our focus on ensuring that our tax rules are internationally competitive and, where sensible, that our rules on taxing offshore investment are in line with international norms.
As with the foundations of a sound tax system and a sound economy, the key planks of our new international tax framework are already in place.
Over the past three years, our international tax rules have been progressively reformed.
In 2007, new rules for the treatment of offshore portfolio investments were introduced.
This standardised the taxation of nearly all such investments, eliminating a significant bias towards investment in certain overseas equities that paid no or low dividends.
Then in 2009 the tax treatment of controlling investments in foreign companies was overhauled.
After almost two decades of comprehensive New Zealand taxation of such investments, a tax exemption was introduced for ‘active’ income such as that from manufacturing or distribution activities.
That brought New Zealand into line with other OECD countries and lowered barriers to the global expansion of New Zealand-based businesses.
Legislation is currently being considered which continues those reforms.
The Taxation (International Investment and Remedial Matters) Bill, introduced in October, proposes extending the active income exemption from controlling investments to non-controlling but significant investments, known as non-portfolio foreign investment funds.
These reforms are helping New Zealand-based businesses to compete more effectively in foreign markets.
Part of international tax is the work we are doing on the international fund services industry concept.
International fund services industry
The proposals to remove tax barriers to non-residents investing through PIEs are progressing well.
Officials have been consulting closely with interested parties on proposals to apply the same tax rates to non-residents investing through PIEs that would have applied if they had invested directly.
This is consistent with the general principle underpinning PIEs that investors should – to the extent possible – be taxed as if they held the underlying investments directly.
The trick here is to keep the rules as simple as possible for PIEs to administer, while ensuring that non-residents pay the right amount of tax on their investments.
We think we are close to designing rules that will achieve this.
An essential element of the design is ensuring that the new rules are optional for PIEs.
The Government aims to include these proposals in a bill later this year that would be passed before the November 26 election.
A second striking difference between the Ross Review and the current focus of tax reform is the importance we now give to tax administration.
The minimal focus the Ross Review gave to international tax reflects the closed economy of the 1960s.
The greater focus we now place on administration reflects changes in technology.
A tax system such as ours relies on voluntary compliance and that means that the way the system is administered must suit the taxpayer.
A first-class tax administration collects revenue and delivers services with speed, certainty and in a way that allows taxpayers to self-manage their tax affairs with confidence in the technology, systems and people they are dealing with.
Starting from April next year, Inland Revenue will be providing secure access, via third party software, to key account information.
This will allow tax agents to view their clients’ tax data from within their practice management solutions.
This new service will be a first step towards a full business-to-business system in future.
Over time, Inland Revenue will expand the information available, moving to greater reliance on electronic delivery of services while ensuring that it does that in a way that builds and maintains community support.
Public consultation last year on options to improve how employers, businesses and individuals interact with Inland Revenue was generally supportive of the intention to improve interfaces and processes, but opposed making electronic communications mandatory.
Meanwhile, a tax bill introduced last November included the information sharing framework discussed in the consultation, aimed at reducing the compliance burden by allowing Inland Revenue to share basic information with other departments so people do not have to keep supplying the same details multiple times to different agencies.
The select committee is currently hearing submissions on this bill and will report back to the House in June.
The information sharing provisions and the proposed changes to secrecy rules have raised some concerns in submissions on the bill.
I want to make it clear that the Government has no intention of undermining the protections on the release of taxpayer’s private or commercial information.
What I am focused on is dealing with the reality that in some instances, the current rules seem too restrictive.
For instance, it does not make sense to me that under current law, Inland Revenue, one part of government, knows of people who are in full-time employment but who are receiving unemployment benefits from another part of government, yet the Department is prohibited from doing anything about that.
It does not seem right that a strict interpretation of the secrecy rules places the Commissioner of Inland Revenue in breach of those rules if he were to apologise publicly for mistakes made by the Department.
I look forward to progress on that bill and expect the concerns raised in submissions will be carefully considered by the Finance and Expenditure Committee.
The concerns raised by submitters are important ones, but I do believe that we can come to answers that are both pragmatic and principled.
Having said all this, although we have made some small steps, business transformation is no easy task.
It requires a long term programme, but the end goal is still the same, that is, to make compliance faster, easier and less costly for taxpayers.
We also intend to provide innovative online services, and help Inland Revenue respond more quickly to future changes whilst maintaining the integrity of the tax system.
Tax policy work programme
An efficient tax system does not stifle enterprise with compliance costs and seeks to minimise the compliance burden on taxpayers and businesses.
As such, the three key drivers of the tax policy work programme are:
- Taxes and growth
- International tax reform, and
- Inland Revenue’s Business Transformation programme
However, as you know, the tax policy work programme is extensive.
Even while a tax system is undergoing reform, there are many other areas requiring policy attention.
Nothing demonstrates this point more clearly than the urgent policy response required for the last month’s Christchurch earthquake.
The Government’s response in the tax area has been swift and varied and ranges from emergency measures for supporting businesses and employers by for example, waiving interest and late payment and late filing penalties through to work on initiatives for encouraging private donations as well as investigating options for raising funds at a governmental level.
Inland Revenue is putting processes in place to provide support to businesses where it can help.
It will, for example, help businesses to re-create their records, using the information that the department already holds about them.
Inland Revenue will also be providing broader advisory support to assist business recovery.
More specifically, the department will work with the Ministry of Economic Development and the Canterbury Chamber of Commerce to develop processes for business recovery support.
Inland Revenue intends to provide up to twelve business recovery coordinators to support this work.
There are fifteen staff helping the Ministry of Social Development to process employer and employee subsidy applications in Rotorua.
Inland Revenue staff are also working with their local Welfare Advisory Groups in Ashburton, Greymouth, Auckland, Wellington, Whangarei, Blenheim, Nelson, Palmerston North and Queenstown.
Around 30 staff from Christchurch are currently redeployed in other Government agencies in Christchurch assisting with recovery work.
Outside of the earthquake, but of particular interest to me, is the Income Sharing Bill I introduced last year.
The tax credit will effectively refund some of the tax paid by couples caring for children where one partner is on a higher tax rate than the other.
It will mean that different couples on the same level of combined income will effectively pay the same combined amount of personal income tax, regardless of how much each partner earns.
The changes proposed in the bill will also mean some couples have greater choices to work fewer or more flexible hours of paid work in order to care for children, by increasing their combined after-tax income.
The confidence and supply agreement between National and UnitedFuture at the last election included National supporting legislation to the first reading stage to allow couples raising dependent children the option of income sharing for tax purposes.
This bill is currently being considered by the finance and expenditure committee.
If the legislation is enacted, income sharing for eligible households will be available from 1 April next year.
I mentioned earlier that the process of reform now includes the opportunity for public feedback and comment.
I will soon release a summary of the feedback received on the Child Support discussion document that was issued late last year and which drew submissions from over 2300 people.
The discussion document outlined a range of options for improving the child support scheme – to make the scheme fairer and to take into account changes in society since the scheme was introduced in 1992.
As expected with an issue that affects so many New Zealanders, there was a huge range of strongly held views, with both the level and tenor of the feedback confirming that the current child support regime is outdated and sometimes unfair.
We intend to make it fairer and more focussed on the well-being of children.
To that end I hope to be in a position to consider and finalise options for change to the child support legislation in the first half of this year for consideration by Cabinet.
GST cross border work
At the other end of the scale, the government is aware of a number of issues that relate to the imposition of GST on cross-border supplies in a business to business context.
Questions have been raised on whether the existing rules for exporting services to non-resident businesses are appropriate from a New Zealand policy perspective, particularly given the position adopted by our major trading partners that operate GST or VAT systems.
Officials are therefore currently conducting a review of this area and anticipate releasing an issues paper for public consultation in the middle of this year.
The theme of this speech is continuity and change in New Zealand tax reform since the Ross Report of the 1960s.
Looking back to that period and to the 1989 GST rise, it’s clear that the tax reform process has changed radically and for the better giving taxpayers and tax professionals greater certainty and understanding.
Some issues have much greater focus as the world has become much more integrated and technology has changed.
But the themes of a tax system that is fair and efficient remain constant.
Mark Stewart | Press Secretary | Office of Hon Peter Dunne
DDI +64 4 817 6985 | Mb +64 21 243 6985