Keynote Address to NZ Institute of Chartered Accountants (NZICA) 2011 Tax Conference
Auckland, 9.30am Friday 11 November
Good morning and thank you for again inviting me to open this conference - New Zealand's premier tax conference.
We are almost at the end of the year and at the end of the first term of the current Government.
And what a year this one has been.
In just this past 12 months, we have not only had to continue to deal with the effects of the worst economic crisis in living memory, but we have also had to contend with some of New Zealand's worst earthquakes and more recently, the Rena foundering on the Astrolabe reef - New Zealand's worst maritime ecological disaster.
Add in Pike River and it truly has been New Zealand's annus horribilis.
Thank goodness for the Rugby World Cup, which was a treat for us all and a fillip for the nation's spirits at a time when we have sorely needed it.
But through this incredibly difficult time, I think we should take some time to reflect on what we have achieved because it is not inconsiderable.
The earthquakes and their ongoing effects have been the biggest combined event of the last 12 months.
On the tax front, in responding to them, legislation was passed in May that:
- provided an exemption from tax and gift duty on trading stock that businesses donated for earthquake relief;
- made certain welfare contributions made by employers to their employees tax-free;
- extended again the redundancy tax credit, this time to 30 September 2011; and
- ensured that certain payments do not count as family income where people receive Working for Families tax credits.
Orders in Council were also promulgated, addressing a range of issues, such as waiving interest on late tax payments and giving the Commissioner of Inland Revenue significant flexibility around easing deadlines for tax obligations.
More recently amendments to the depreciation rules which allow roll-over relief for depreciation recovery and to the timing of deemed sales of destroyed insured assets have been enacted.
Further earthquake-related work is under way, mainly in the depreciation and insurance claims area,
A thin capitalisation amendment is also proposed.
In response to the earthquake, New Zealanders opened their hearts and have displayed great generosity.
Many took up the option of not just donating, but also donating their tax credits as well to the Earthquake Appeal.
Latest figures show that just over 2100 people donated a total of $394,000 in donations tax credits to the Appeal.
For Christchurch, and nationally, the Government believes that we have in place the key components to stimulate the economy and promote growth and we expect to return to Budget surplus by 2014/15.
I would like to talk about some of the gains we have already made in the tax arena.
Removing obstacles to growth
Firstly, there are a number of significant ways in which are working to remove obstacles to growth.
To stimulate the economy, we can help level the playing field for New Zealand firms to allow them to expand and compete internationally, and the Government has been busy in this area.
The international tax rules have been progressively reformed to bring New Zealand's rules more into line with our international trading partners and help New Zealand-based businesses to compete more effectively in foreign markets.
Over the last year New Zealand has also continued to expand its tax treaty network.
A treaty with Turkey entered into force in July, while a treaty with Hong Kong signed last year is expected to enter into force this month.
Existing double tax agreements with Canada, the Netherlands and the United Kingdom are being renegotiated.
And two new DTAs are being negotiated - one with Vietnam and the other with Papua New Guinea.
Other work in this area includes extending our network of tax information exchange agreements.
These allow countries to exchange relevant information and are an important benchmark in meeting OECD standards for transparency.
They are also a tool for improving compliance.
Our tax system relies on voluntary compliance.
The good news is that the great majority of taxpayers comply with their tax obligations, because our system is essentially a simple, broad-based tax system.
And importantly to the person in the street - it makes sense and, crucially, is seen as fair.
Work continues on reducing complexity, improving fairness and maintaining the integrity in the tax system and some important gains have already been made.
Chief among these are the alignment of the top personal and trustee rates.
It has been said that every system is perfectly designed to produce the results that it does.
And this was certainly true of our tax system with its previous tax rates and the explosion of family trust-owned structures.
The Penny and Hooper case clearly illustrated that.
While the average taxpayer will always be likely to support Inland Revenue pursuing artificial and contrived arrangements that have the effect of allowing a few to avoid taxes that most pay and offend our basic sense of fair play that of itself is not a sufficient policy rationale for doing so.
We need to take a more balanced view.
Both the courts and Inland Revenue have made it clear that businesses are free to use company and trust structures - as long as these are not used in an artificial and contrived manner to try to defeat tax law.
I am pleased that Inland Revenue in its Revenue Alert moved quickly to allay fears of administrative over-reach as well as providing welcome clarity and guidance following the Penny and Hooper decision.
The department has again emphasised that they will focus only on the most serious and artificial cases.
To my mind, that is a very sensible and pragmatic approach.
The alignment of the top personal and trustee rates in Budget 2010 has reduced the future opportunity for such cases.
Also flowing out of Budget 2010 and related to these issues, an additional $274 million funding over 10 years was allocated to Inland Revenue to undertake increased compliance work in:
- debt compliance
- tackling the hidden economy
- property compliance.
Improving compliance is a priority because it is important that everyone pays their fair share.
Taxes pay for our hospitals, schools, police, infrastructure, conservation work and generally the resources and assets we share as a common good in our society.
Inland Revenue reports that more tax is being paid on time and inroads are being made into the hidden economy with more people coming forward with voluntary disclosures.
For the year ended 30 June 2011
- cash collected was $115.3 million against a target of $100 million, and
- discrepancies raised totalled $137.8 million against a target of $83 million.
That is a very positive outcome and a healthy rate of return.
For debt compliance, the target rate of return for each dollar invested was 8:1 and the actual rate achieved was 9.5:1.
For the hidden economy, the target was 3.4:1 while the actual was 5.8:1.
And for property compliance, the target rate of 6.8:1 was surpassed with an actual rate of 7.5:1 achieved.
As I have said, the vast majority of taxpayers comply and it must be noted that Inland Revenue's emphasis is on prevention and assistance before it takes recovery and enforcement action.
Another issue that needs to be addressed is around foreign superannuation.
The current rules for taxing New Zealand residents on their foreign superannuation are complex, and in some situations it is not clear that they achieve the correct policy outcome.
A policy review of taxation of foreign pension schemes will be included in the work programme for next year.
A discussion document is expected be released in the first half of 2012, with legislation likely to be introduced in late 2012.
I am aware that there may be cases where taxpayers are not certain whether they have paid the correct amount of tax on their foreign superannuation.
I understand that Inland Revenue will be taking a pragmatic approach to such cases prior to the release of the discussion document
Reducing compliance costs
A good tax system also seeks to minimise compliance costs and here, too, we have made progress.
If part of the tax system is no longer working as intended or has become obsolete, and is simply imposing undue compliance costs, then questions must be asked about its continued existence.
That is a pretty good description of why gift duty is no longer in place.
It continued to impose $70 million of compliance costs on New Zealanders each year, while no longer serving its intended purpose.
It returned a pittance.
Something like a million a year for that $70 million in compliance costs.
It was a relic of the estate duty era, long since passed, and overtaken by other developments.
A range of existing rules in the Income Tax Act better target tax avoidance arrangements involving gifts.
And last year's Budget further reduced opportunities for avoidance by aligning the trust and top personal rates.
It is therefore a source of great personal satisfaction for me that on 1 October this year, gift duty was finally relegated to the history books.
Gift duty's abolition does not mean it is now open slather for people to be able to gift away assets in order to now qualify for various asset tested government programmes from which they would have been hitherto excluded.
Health and Ministry of Social Development officials have their own legislation to cover such situations, and we would expect that to be enforced no less vigorously now that gift duty has been abolished to prevent potential abuses. For its part, Inland Revenue will continue to monitor the situation, and a post-implementation review will ensure that existing measures are operating as intended.
From reducing compliance costs I would now like to turn to fiscal restraint - a prime focus for the Government.
The global economic outlook remains fraught, with the United States and Eurozone hanging precariously on the edge of serious recession.
The uncertainty has of course affected us here with our recent sovereign credit downgrades, and this illustrates why it is crucial that we as a nation work to reduce debt and particularly our dependence on foreign debt.
The Government has repeatedly stated its intention to reduce expenditure.
This makes sense because fiscal restraint supports growth by building confidence.
Fiscal restraint and prudently managed debt gives the assurance that the government will not raise or impose further taxes so businesses can make plans for expansion and hire new staff.
And of course it also helps to keep interest rates low, which is good for growth.
So it was imperative that the Government acted to make efficiency savings.
As you know, Budget 2011 made adjustments to KiwiSaver, Working for Families and student loans - three large government spending programmes.
Take KiwiSaver as an example.
Before the Budget changes, more than $1 billion a year of what went into KiwiSaver accounts came from the Government, through subsidies and tax breaks.
This was doing nothing for national savings as the Government needed to borrow to pay that money into individuals' accounts.
Maintaining that level of expenditure was, frankly, dicing with debt.
Therefore, the changes we have made to Working for Families and to KiwiSaver will makes those schemes more targeted and more sustainable over the long term.
And I must stress that the Government is committed to KiwiSaver.
In fact, a one-off enrolment exercise, targeting employees who have not changed their jobs since the introduction of KiwiSaver in 2007 was recently announced by the Minister of Finance.
This exercise will take place in 2014/15 subject to returning to surplus, as part of the Government's programme to build genuine national savings.
A consultation paper on the design of the exercise will be released next year and will focus on costs for employers and administration costs of the scheme for government.
And the proposed changes to student loans which will tighten up the rules around eligibility and repayments will ensure that people can continue to access tertiary education without being a burden to taxpayers.
The Government's priorities are focused firmly on getting the New Zealand economy on its feet again and making it stronger than before and these are some of the measures that Government is taking to build confidence and stimulate the economy.
New Zealand received some significant knocks over the past year but we have responded to them well.
And from the successes we have had, you can see that the Government is supporting the business sector by providing an environment which creates jobs and wealth.