Keynote Adress to
KPMG 2011 Christchurch Tax Briefing
Russely Golf Club, Christchurch
4pm Thursday 9 June 2011
Much has happened recently on the tax front which is of direct relevance to you and I would like to take this opportunity to talk about this afternoon.
But first, let me say that I am very pleased to be here today.
Pleased to be invited to the KPMG Tax briefing, but especially pleased to be back in Christchurch.
The fact that you have organised a conference and are holding it here in Christchurch, tells me that you are getting back to business as usual.
And that is precisely what Christchurch needs.
It is at once a vote of confidence in this city and a practical means of helping in its rebuilding and reinvigoration.
Just as you are doing your bit, I can assure you the Government is completely committed to doing its large chunk of that job too.
To help Christchurch get back to business, Parliament last month passed legislation which will provide earthquake relief to the citizens and businesses of Canterbury.
I am sure you are familiar with the content of the legislation, but briefly, it:
- provides an exemption from tax and gift duty on trading stock businesses have donated for earthquake relief;
- makes certain welfare contributions made by employers to their employees tax-free;
- extends the redundancy tax credit from its current end date of 31 March to 30 September 2011;
- ensures that certain payments do not count as family income where people receive Working for Families tax credits.
These changes to tax legislation were necessary - our current tax laws were simply not designed for such extraordinary circumstances as disaster on the combined scale of the two Christchurch quakes
Also Orders in Council have been promulgated, the most important of which gives the Commissioner of Inland Revenue significant flexibility with regard to deadlines for tax obligations.
Inland Revenue also swung into action over charities and donations, providing operational solutions and timely advice around the interpretation of current law and the tax treatment of donations and the charitable status of particular organisations.
I was especially pleased with a flyer the department sent out with its end of year charitable tax credit claim forms letting donors know that they could donate their tax credits, or rebates, to the Christchurch Earthquake Appeal.
I understand that at least $80,000 has been donated to the Appeal through this initiative alone.
The Commissioner and his officials have also encouraged charitable donations from overseas by contacting overseas jurisdictions to help smooth the tax treatment of donations to the Appeal.
I am delighted that these practical measures have been well received by national and Christchurch-based tax communities.
This is still an evolving situation, with new challenges and issues arising all the time, so I expect to bring further earthquake-related depreciation changes to the House later this year.
On a human level, along with everyone else in Christchurch, Inland Revenue staff have, naturally been affected by the earthquake.
Like KPMG and much of Christchurch's CBD, Inland Revenue staff are working from temporary office space.
The department has a number of its people working in the community and with other agencies including the Ministry of Social Development, Ministry of Economic Development, Department of Labour, Canterbury Development Corporation and Canterbury Employers' Chamber of Commerce.
The department is assisting CERA with economic data for the purposes of modelling to understand the economic impacts of the earthquakes.
CERA is also getting hands-on help from the department, with a number of Inland Revenue staff seconded to it.
I would like to turn now to the Budget handed down last month..
Budget 2010 set the scene last year when it brought in a number of changes to strengthen our tax system.
A sound tax system is a good platform for Government to begin consolidating and strengthening the economy and getting on with rebuilding Christchurch and both its and the national economy.
If we are to ride out future economic shocks, we urgently need to reduce our dependence on overseas debt, build up our capital and return the economy to surplus as quickly as possible.
If we cast our eyes overseas, the outlook is not encouraging.
Japan, reeling from the twin onslaught of a devastating earthquake and lethal tsunami, compounded by the threat of nuclear power station meltdown, is going to have an effect on world markets.
Ireland, not so long ago trumpeted as an economic miracle, has now joined the company of Portugal, Spain and Greece, and is noted today for its economic woes.
The Government is determined to avoid that fate for New Zealand.
I think Budget 2011 has gone a long way to warding that off.
Notably, we have preserved our credit rating and that has been achieved by delivering a Budget that addressed certain key points - curbing government spending and improving national savings while still continuing to meet the Government's obligations and take account of other priorities.
To weather future economic shocks, it is crucial that spending is contained and focused on those who really need it.
The changes to Working for Families and KiwiSaver will make these programmes more sustainable by focusing them better to ensure that Government spending is directed to where it is needed most and eliminating unsustainable spending.
Working for Families
The cost of Working for Families has roughly doubled from about $1.5 billion in 2005/06 to about $2.8 billion this year.
In the current economic environment, that level of spending is no longer sustainable, if ever it was.
Indeed, without changes, the scheme would quite quickly become unaffordable.
The government was not prepared to entertain that possibility, so acted now to secure Working for Families for the future.
Therefore, Working for Families recipients on higher incomes will find their tax credits will reduce at a faster rate and the reductions will begin at an earlier point in their salary scale.
Some will no longer qualify.
I think New Zealanders have recognised that is simply fair and necessary.
The amount paid for older teenagers will not be indexed for inflation until the amounts for younger children catch up.
All Family Tax Credit amounts will then be adjusted for inflation.
Together, these changes will save $448 million over the next four years, as against what the scheme was forecast to cost.
The total cost of Working for Families will reduce to $2.6 billion in 2014/15, yet the scheme remains a generous one and targeted to assist those most in need.
Low income families and beneficiaries will be largely unaffected by these changes, and the majority of families currently receiving Working for Families will get an increase in their payments on 1 April 2012.
The other big spending programme tackled by Budget 2011, was KiwiSaver.
First of all, let me say that the Government is committed to improving national savings, but it has to be real saving.
KiwiSaver has been good at encouraging the savings habit among New Zealanders, but like any taxpayer-funded programme, spending needs to be prudent.
Currently more than $1 billion a year of what goes into KiwiSaver accounts comes from the Government, through subsidies and tax breaks.
Over time, government has put in nearly half the money that now sits in KiwiSaver accounts.
This is not doing anything for national savings as the Government needs to borrow to pay that money into individuals' accounts.
Instead of contributing to national savings, it is putting us further into the red.
Under its current settings, it is certainly not sustainable.
To continue to be an efficient part of the savings landscape, KiwiSaver needs to be an affordable retirement saving scheme for members, employers, and taxpayers.
The changes to KiwiSaver will ensure the future of KiwiSaver by making the scheme more affordable, while continuing to encourage real savings through a higher level of private contributions.
By any measure, Kiwisaver has been extraordinarily successful.
Today, more than 1.7 million New Zealanders are KiwiSavers, and that number is projected to reach 2 million next year.
Yet, when it was established, it was forecast that uptake would be far more modest - with only 700,000 KiwiSavers by 2015.
The government's fiscal projections of KiwiSaver's costs were based on those projections, so it has been important to act now to secure the scheme's long-term future.
And another change announced in Budget 2011 was the change to the minimum equity percentage for foreign-owned banks.
This will ensure that these banks pay their fair share of tax, better reflecting the higher levels of regulatory and commercial capital they now hold.
The Budget also announced upcoming reviews which had fairness as a major theme.
Consultation documents will be released later this year looking at the tax rules relating to three issues: employee benefits, the livestock valuation election rules and assets used both privately and to earn income.
If you have a view on these matters, I urge you to make a submission.
The intention of these reviews is to ensure we all pay our fair share of tax.
I will give you an overview of those three areas to be investigated, but first, let me say that I am not suggesting that people everywhere are ripping off the system.
Perhaps some are, but for the most part, people are simply operating within the current rules, which may, in some instances be more generous than they should be.
It is time to review these rules because the Government has a strong focus on ensuring fairness in the tax system.
Budget 2010 broadened the definition of income for social assistance purposes, such as entitlement to Working for Families, to provide a better measure of family income and to prevent people structuring their affairs to inflate their entitlements.
Now the question being considered is whether a wider range of benefits provided to employees should be included in the tax net.
Of particular concern is that, in some situations, salaries can be traded off for non-cash benefits which are not taxed.
One result is that people are not taxed equally or some receive entitlements under social assistance programmes that others do not.
This is unfair to the tax-paying public which foots the bill for these assistance programmes.
Livestock valuation election
Some of you with rural clients or interests may be familiar with the livestock valuation election rules.
There are two main livestock valuation methods - the herd scheme and national standard cost and these differ in design and intent, and ultimately outcome, with substantial possible difference in values between them.
The fairness question that has arisen is when a farmer is able to switch back and forth between the two methods with relative ease, taking tax-free herd scheme gains when livestock values are increasing and tax deductible write-downs as values decrease.
The net result can be that the increases in market valuations go untaxed, while the tax system can allow decreases in valuation to be eligible for tax deductions.
I think ultimately people do have a sense of fairness and when they know that something is not fundamentally fair to all concerned, there is no particular protest when it is being put right.
An officials' issues paper is likely to be released on this in early July.
Mixed use assets
After the Budget announcement of an upcoming review of the tax treatment of mixed use assets, there was some concern that Government was looking to impose what some media termed a "recreation tax".
Let me clear that up right now.
The Government has nothing against anyone owning a holiday home - good on you if you do.
An asset such as a holiday home that is used exclusively for private use and therefore with no tax deductions claimed, is not being looked at.
The Government's concern is best illustrated by the example of a family bach, used by the family five weeks a year, and rented out five weeks a year.
There is no issue with the owners claiming tax deductions relating to the five weeks per year that the bach is rented out, and it is clear that no deductions can be claimed for the five weeks per year when it is used by the family.
The question is whether it is fair for the owners to potentially be able to claim deductions for the 42 weeks per year that the bach is empty.
It seems to me that if deductions are allowed on a basis which is too generous, there would be two undesirable consequences.
First, it would be unfair on other taxpayers.
Second, it would provide an incentive to invest in these kinds of assets at a time when New Zealand needs more investment in productive sectors of the economy.
A discussion document will be issued later this year exploring this issue and calling for submissions.
In the meantime, I just say to some in the media that their excitement is unnecessary and inaccurate, that it is Labour that does envy taxes, not this government, and that in the end, fair is fair.
The Budget also included announcements of changes to the Student Loans scheme.
Our loans scheme is one of the most generous in the world.
The question must be asked though, is this spending justified?
Can we afford it?
The scheme is important for ensuring ready access to tertiary education and the Government is committed to its continuation.
Indeed, the Government is committed to interest free loans, but is still looking at ways to improve value for money and personal responsibility.
However debt has mounted steadily since the scheme's introduction and some trimming is essential.
The proposed changes include:
- Part-time, full-year students' course-related cost entitlements are to be removed.
- The repayment threshold of $19,084 will be held until 2015.
- Business and investment losses will not be allowed to reduce income for Student Loan purposes.
- Eligibility for Student Loans will be restricted for those with an overdue student loan repayment obligation of $500 or more and who have been in default for one or more years from February 2012.
- All new loan applications will require a contact person for study commencing after 1 January 2013.
- The exemption to the two-year stand-down for new permanent residents will be extended to include people sponsored into New Zealand by a family member who was granted residence on the basis of their protected persons status.
- Student loan eligibility for borrowers aged 55 and over will be restricted to tuition-fees only from 1 January 2013.
- The repayment holiday for overseas based borrowers will be reduced from three years to one year, effective from 1 April 2012.
- A cap on aviation fees of $39,273 (GST excl) will be introduced from 1 January 2012.
I will be introducing a bill containing the proposed changes to the House later this year
More immediately, there has been recent media coverage of the Government's new approach to collecting debt from defaulters in Australia which includes legal action.
This was a more proactive approach which began in November last year and has yielded some very good results with over $2 million in repayments collected in just the first six months of its operation.
Considering the results we have achieved in Australia, my colleague, the Minister of Tertiary Education, Hon Steven Joyce, and I are currently considering scaling up the initiative in both Australia and Britain.
I think it is important to ramp up our approach.
For too long a small group of borrowers have reneged on their loans which is unfair to taxpayers and also to those borrowers who are doing the right thing and repaying their loans.
Of course debt does not just exist in the Student Loan scheme.
Our tax system relies on voluntary compliance as that is the most efficient way to gather taxes.
However not all taxpayers comply readily or pay their tax debts.
As I have said before, we all need to pay our fair share and the Government has a very strong focus on ensuring fairness in the tax system.
This is an ongoing effort and over the last two Budgets, measures have been introduced specifically aimed at ensuring we all pay our fair share of tax.
Budget 2010 allocated funding of $119.3 million over four years for:
- reducing debt
- uncovering and taxing the hidden economy, and
- increasing property compliance
This is the sharp end of compliance and ensuring fairness.
It is giving teeth to be used as necessary when there are those who simply will not play their part and pay their taxes.
Inland Revenue has used this extra funding to enhance existing fraud and evasion work undertaken by the department.
It has focused on high-risk areas and has undertaken extra audit and educational work in the hospitality sector where its intelligence procedures have indicated non-compliance.
The additional funding has also allowed Inland Revenue to upgrade its intelligence-gathering capabilities and it is preparing to undertake compliance work across a range of industries in the coming year.
Stepping up their activities in recent times, there have been some notable successes including a voluntary disclosure for $2.2 million from one restaurant and prosecutions of several tax cheats.
You may have seen the media coverage.
Inland Revenue has also intensified efforts to prevent people falling into debt.
For example, a number of your clients will have received text messages, letters or phone calls reminding them to make their payments.
Leading up to the 7 February due date for paying 2010 income tax, the Inland Revenue reminder campaign achieved an 11 percent increase in assessments paid on time.
Of course, the Government is very aware of circumstances in Christchurch and taking people's and businesses' circumstances and realities into account.
"Fairness" is not just about tax cheats, but also about ensuring that tax debts are paid.
This is of course, subject to hardship and instalment arrangements in place with Inland Revenue.
Inland Revenue has the power to act reasonably and sensibly and I expect it to do so.
For example, after the February earthquake, to the extent possible, the Department halted all proactive debt recovery work in the earthquake-affected area.
As things start to return to something closer to normal, these activities will pick up again, but I am assured by the Commissioner that Inland Revenue is very conscious of the difficult position many in Christchurch face.
Next month Inland Revenue will again publish its areas of compliance focus.
These are specific areas where Inland Revenue has identified risk and is developing plans to address them.
You could help by also paying close attention in these areas.
As tax agents you wield significant influence in ensuring your clients play their part in making New Zealand a great place to live.
Global Forum report
Overall, I am pleased with the progress we have made with our tax system and a recent international report just released, endorses this view, giving the New Zealand tax system a high pass mark when measured against the international standards for transparency and exchange of information.
A highly respected tax system is important in facilitating investment into New Zealand and makes it easier for New Zealand business to invest offshore
There is of course, room for improvement and we shall continue to do so.
Improving the fairness of the tax system to ensure that we all pay our fair share of tax is ongoing work, and the Government is progressively eliminating unfairness.
The large majority of people do pay the right amount of tax, but there are a few who do not and Inland Revenue takes appropriate action to protect the integrity of the tax system.
I do not need to remind anyone here that the Government needs taxes in order to fund health, education, roading, justice, conservation and rebuilding Christchurch, along with a host of other essential services.
We all use these services, so we all need to contribute our fair share to the funding.
I hope your conference is enjoyable and productive.