Tax policy work programme 2012/13 announced
“A sound tax system is a good platform for Government to begin consolidating and strengthening the economy and getting on with rebuilding” says Revenue Minister Peter Dunne.
Mr Dunne was speaking at the International Fiscal Association’s annual conference today where he released details of the Government’s tax policy work programme for the next eighteen months.
The new tax policy work programme consolidates the reforms to the tax system of recent years. Mr Dunne says that after the tax reforms of Budget 2010, the tax system is in good shape.
The work programme also supports the Government’s plan to get back to surplus through the responsible management of Government’s finances, says Mr Dunne.
The tax policy work programme for 2012/13 aims to support the government’s priorities to:
- responsibly manage the Government’s finances and tax system
- build a more competitive and productive economy
- deliver better public services
- rebuild Canterbury
The new tax policy work programme has a strong focus on increasing efficiency and fairness in the system. Amongst a range of initiatives intended to improve efficiency and fairness, the work programme also includes work on items first announced in Budget 2011 and further work relating to Student Loan repayments from overseas-based borrowers.
“Now, more than ever, it is essential to have a good, cost-effective tax system – one that collects the necessary revenue efficiently – meaning low economic costs, low compliance costs and low administrative costs” Mr Dunne says.
For more details of the tax policy work programme, see the Minister’s speech and the published work programme at taxpolicy.ird.govt.nz.
Mark Stewart | Press Secretary | Office of Hon Peter Dunne
(04) 817 9890
Address to IFA annual conference
Thank you very much for inviting me to speak to you again.
Much has changed since I spoke to you last year, but also a great deal still remains to be done.
This time last year we were still coming to grips the devastating Christchurch earthquakes – and there have been more since, having not only just a profound effect on the people of Christchurch, but also on the country as a whole, and the very psyche of our nation.
The imperative of helping Christchurch recover has absorbed us at almost every level of society, in a way we have never had to confront before, nor imagined we would ever face in this country.
It is not just the impact on the Budget deficit – considerable as it has been done – but also the impact on so many lives and businesses, and the way in which we deliver services to the people of Canterbury.
If that unprecedented crisis alone is not sufficient, we have also had to brace ourselves for further turbulence from offshore.
Plus ça change, as our European friends would say.
The Greek government has managed to cobble together a deal and the immediate crisis for now appears to have been averted.
The world economy however, is not out of the woods yet.
The austerity measures demanded as part of the Greek deal will not be easy to implement and while lessened, the threat of recession still hangs over Europe.
Much of Europe’s response to date appears to have been driven by the new alliance of Germany’s Chancellor Merkel and France’s President Sarkozy.
It is an open question as how much of that momentum can be retained, if President Sarkozy is not re-elected President of France in the next few weeks.
And if that were not a sufficient puzzle, we need only recall that the Asian economies appear to be going off the boil.
A downturn in Asia would surely be bad news.
China is now our second-largest trading partner.
A decline in Chinese economic growth, with a subsequent reduced demand for minerals from Australia, our largest trading partner, would have clear consequences for New Zealand.
The point is that world markets are notoriously skittish and we want to avoid a situation where we are rushing about applying quick-fix measures every time a new crisis arises.
In a situation where we are living through the most challenging economic circumstances since the Great Depression we need, above all else, to be keeping our nerve, and focusing on what needs to be done, rather than lurching from one short-term palliative, to the next.
If we are to ride out future economic shocks, we urgently need to reduce our dependence on overseas debt, build up our capital stock and return the Government’s books to surplus as quickly as possible.
All this leads me to the Government’s priorities as outlined in a recent speech by the Prime Minister.
- The responsible management of Government’s finances
- Building a more competitive and productive economy
- Delivering better public services to New Zealanders, within the tight budget the Government is operating under, and
- Rebuilding Christchurch.
A sound tax system is a good platform for Government to begin consolidating and strengthening the economy and getting on with rebuilding.
The updated tax policy work programme agreed between the Minister of Finance and me supports these priorities and I would like to share some of the details of the work programme with you.
But before I begin talking about the work programme in detail, I would like to provide some context – a philosophical entrée, if you like - to give you an insight into some of the thinking that has gone into the development of this tax policy work programme.
It goes like this.
2012 is going to hold challenges with economic uncertainty ahead.
An important contribution the government can make to help the country withstand offshore economic shocks is to get the government’s finances in order, get debt under control and reduce our over-reliance on foreign debt.
Rising debt means greater debt servicing costs, which crowds out more worthwhile expenditure.
It also leaves us vulnerable to moves by credit ratings agencies, which can impose higher economy-wide interest rates.
So it is important that New Zealand maintains robust taxes to finance government spending in ways that are as fair and efficient as possible.
To assist with returning to surplus, we need to raise the revenue we need to fund Government services and functions.
Typically the things a government can do to raise revenue are:
- Apply existing tax bases more broadly to reduce distortions to investment and increase fairness so that the tax burden is spread more evenly.
- Increase tax rates on existing bases.
- Extend existing tax bases so that income tax for example is widened to cover capital gains.
- Introduce a completely new tax base, and lastly
- Put more focus on enforcing current rules.
Now if simply raising a lot of new revenue is the only objective, there are all manner of things we could do.
We could raise significant amounts very quickly by increasing tax rates, extending the tax base and imposing new taxes but at what cost?
Yes, we need to raise revenue to reduce further borrowing and get us on a more secure footing, but what New Zealand needs even more is investment flowing into productive sectors of the economy.
Now, more than ever, it is essential to have a good, cost-effective tax system – one that collects the necessary revenue efficiently and at minimal cost – meaning low economic costs, low compliance costs and low administrative costs.
Crucially, what we need for our economy is a cohesive, considered policy work programme, free from ad hoc measures developed in reaction to the latest perceived crisis.
This programme gives business the certainty of where the economy is heading and how it will get there.
Another point I would make about our tax system is that it is well regarded internationally for its coherence and simplicity.
You have to ask yourself, why is that so?
I believe the answer lies in an understanding and acceptance across several past governments and the private sector that a tax system is essentially just that.
It is a means for taxing, and not a means for solving society’s ills.
Of course we do have some aspects of that in our system – the duty on tobacco is a prime example, but compared with other tax systems, we are relatively free of such instruments.
Once you start burdening the system with policy levers to engineer social change, the system begins to lose coherence and distortion creeps in.
And that will erode the ability of the tax system to carry out its primary function – to tax in order to fund government services and functions.
It is not about envy, or settling old political scores.
For a system such as ours - which relies on voluntary compliance- simplicity and coherence are all-important.
The tax system must be free to carry out its primary function and in doing so, allow investment to flow naturally.
A good tax policy work programme therefore does not set out to change the world.
Instead, it focuses on doing what a tax system does best and aims to improve that.
So the work programme I am announcing today has a strong focus on increasing efficiency and fairness in the system.
In doing so, it will also raise extra revenue – it has to.
That is the responsible thing to do and right now, we need responsible fiscal management.
A key platform for the Government’s plan to get back to surplus is through the responsible management of Government’s finances.
Part of this as I have already indicated, is achieved by sustainably raising revenue.
Perhaps more importantly, the central theme for this work programme is the desire to make the system fairer.
The tax burden must be shared equitably and this aligns neatly with the Government’s first priority of responsibly managing Government’s finances.
As an aside, I would add that now is probably not the time to be moving the line on tax avoidance.
I am more focused on making sure we collect the revenue currently legitimately due to us through our broad based, low rate system, before embarking on new taxes, which almost inevitably would fall more harshly on some than others.
The final point I want to make about the tax work programme before I go into the detail, is that it has not been developed in isolation.
Officials have consulted with the private sector on this.
Small and medium enterprises
The Government is focused on supporting businesses to grow and there are several items on the work programme designed to assist businesses.
In particular a large number of small and medium enterprises will benefit from some of the policy initiatives being considered.
These measures will have compliance costs savings for SMEs and are part of a continued focus on growing businesses.
In 2009, for example, the Government allocated $484 million over the forecast period for a SME tax assistance package that further simplified tax arrangements for SMEs and reduced their compliance costs, giving greater support for small businesses to grow.
The Government has also recently announced that most small and medium enterprises with annual revenue of less than $30 million and assets less than $60 million will no longer be required to prepare general purpose financial reports.
Inland Revenue will also be introducing minimum financial reporting requirements for these companies.
The application date for this has yet to be confirmed.
By minimising compliance costs, we encourage growth by making the tax system fairer.
Let me continue the theme of fairness, by discussing items first announced as part of Budget 2011.
Mixed use assets
When assets – for instance, holiday homes, planes and yachts - are used partly for private purposes and partly to derive assessable income, it is necessary to determine what proportion of expenses can be deducted in deriving that income.
Maintaining the current treatment of these mixed use assets in my view, is tantamount to asking the taxpayer to subsidise the assets.
An officials’ issues paper released last year suggested new rules categorising mixed-use assets into different groups based on the underlying use of the asset, and prescribed the level of deductions that owners in each group can claim.
Some very useful consultation has followed and the policy is now being finalised.
The final proposals will be in a tax bill towards the middle of the year.
The issue here is that some people are not taxed equally and/or receive unfair entitlements to social assistance programmes.
In the interests of a fairer and more economically efficient tax system the question we had to ask ourselves was whether the tax rules should be further widened to include untaxed benefits that are substitutes for salary, particularly when a salary trade-off is involved.
Furthermore, in a number of instances those benefits, and fringe benefits more generally, are often not included in the definition of income for social assistance purposes (such as entitlement to Working for Families).
This is unfair to people in genuine need and to the taxpaying public which foots the bill for these assistance programmes.
Budget 2010 broadened the definition of income for social assistance purposes to provide a better measure of family income.
This included attributed fringe benefits provided to shareholder-employees who control a closely held company, with the question being left open at that time as to whether more non-cash benefit situations should be included at a later date.
An officials’ issues paper is being prepared, providing some suggestions in these areas.
I anticipate the paper being released before the middle of this year.
Valuation of livestock
A fairness issue appears to exist with the current livestock valuation mechanism.
The nub of it is that at present, farmers can choose to value their livestock under two systems.
The problem arises when a farmer is able to switch back and forth at will between the two methods choosing the more favourable outcome for tax purposes.
The net result can be that the increases in market valuations go untaxed, while decreases in valuation can be eligible for tax deductions.
Livestock is an asset like any other and I think the fairness question arises when you consider that no other industry enjoys such latitude with regard to the tax treatment of its assets.
Another aspect of fairness and the responsible management of the Government’s finances and the tax system is improving the coherence of the system.
Taxing New Zealand residents’ foreign superannuation
The taxation of New Zealand residents’ foreign superannuation can be very complex.
This complexity arises in part, from the fact that the current rules for taxing New Zealand residents on their foreign superannuation are not necessarily coherent.
Lack of coherence can also lead to outcomes that may not be fair.
A review of foreign superannuation has therefore been included in the work programme.
A discussion document is expected be released in the first half of 2012, with legislation likely to be introduced in late 2012.
Black hole expenditure
The issue of black hole expenditure — in other words, business expenditure that does not result in a tax deduction — can be a vexed one.
Just because a business incurs expenditure does not automatically mean it should be deductible — either immediately or over time.
If the expenditure is incurred to provide an enduring benefit, generally the correct treatment is to deny a deduction.
If however, a business incurs expenditure to provide benefits over a finite period, the correct treatment is to provide a deduction over that period.
The trick in this area is deciding which category a particular expenditures falls into.
This is not always an easy exercise and private sector input has been very valuable.
The Government is aware of a number of black hole expenditure items that should qualify for a deduction.
Denying a deduction in these circumstances distorts investment decisions and therefore damages the economy.
We have therefore decided to progress a number of remedial amendments in the area of black hole expenditure as a matter of priority.
These are in the areas of costs incurred on certain fixed life resource consents and certain company administration costs
Consideration of amortisation of capital raising costs is not on the new work programme — the Government considers this is a matter to be revisited once fiscal pressures ease, and once work begins in that area, the usual public consultation will occur.
A competitive and productive economy
Consultation is of course key, and I mentioned before that the tax policy work programme is developed in consultation with the private sector.
Naturally, the private sector has an interest in seeing an environment that supports growth.
The work plan for the next eighteen months therefore I am pleased to tell you includes a number of items which align with the views offered by the private sector, including active income exemption for branches and seeking mutual recognition of imputation and franking credits with Australia.
These are two of a number of items raised by the private sector and adopted onto the work programme as officials considered they would add to the fairness and efficiency of the tax system.
Of course any discussion of efficiency of the tax system and the tax administration must also include mention of the systems used by Inland Revenue.
Inland Revenue’s business transformation
Inland Revenue’s technology systems are ageing and our ability to implement complex or major policy change is declining over time.
In the last few years it has become increasingly apparent that a system designed well before the advent of the internet and e-services has become a significant challenge to the efficiency of our tax administration.
Inland Revenue’s FIRST system, originally intended solely for the administration of tax, has seen its role expand to include the administration of a great many non-tax programmes such as student loans, Child Support and KiwiSaver.
This has resulted in greater systems complexity, loss of agility and efficiency, and increased administration costs.
Clearly, steps have to be taken to continue to ensure the efficient operation of our tax system into the future.
The economic and fiscal position calls for a tax system that is as efficient as possible in raising the revenue the Government needs to meet its funding requirements, and flexible enough to accommodate future changes.
Work in this area is currently being progressed as a key priority with an expectation of a fuller understanding of its scope by mid-year.
Last month’s release of the Government’s intended direction with welfare reforms has indicated a strong focus for the Government in this term.
The tax policy work programme will provide input on tax issues such as Flexi-Superannuation and sharing of information, including for law enforcement purposes.
Elements of this work are likely to require legislation to support operational and other change.
The final item I will mention is also the Government’s final priority—Rebuilding Canterbury.
Last year, the tax work programme was expanded hastily to respond to the earthquakes in Canterbury.
There are a number of tax issues arising from the Canterbury earthquakes, principally regarding the treatment of insurance proceeds and depreciation of damaged property.
We have attempted to respond deftly and flexibly to these challenges, to make it as easy as possible for Canterbury people and businesses to meet their tax obligations, while recognising all the while the many other stresses in their lives at present will often mean that tax is the last thing they want to think about.
At an operational level, Inland Revenue is now spread across many different sites in Christchurch, and new working partnerships have been developed, often through sheer force of circumstances, with other government agencies, which are leading to more joined up services, and in so doing, teaching valuable lessons for the future, not just for service provision in Christchurch, but across the country as well.
These, then, are some of the high priority projects on the new tax policy work programme and I hope this has given you some idea of the thinking and conditions that have influenced its development.
The development of the work programme is a complex business requiring the consideration of a range of different factors including the public good, examination of international and domestic economic conditions, the resources and time needed for policy development, legislation and implementation, as well as communication and consultation.
It must also take cognisance of practical matters relating to tax administration, such as Inland Revenue’s technology systems.
What I feel we have produced is a cohesive, balanced work programme.
I would make the point that one thing that policy makers have learned from the onset of the Global Financial Crisis and the Canterbury earthquakes is that a well-designed, agreed work programme can be overtaken by events, and work diverted elsewhere at a moment’s notice.
So although this work programme will evolve, what I have outlined should give you a greater understanding of the Government's direction in tax policy.
More details of the work programme can be found on the tax policy website – taxpolicy.ird.govt.nz
Once again, I thank you and the organisations that many of you represent for the important contribution that you make to tax policy development in taking part in the consultative process.
I wish you a very successful conference.