Address to Accountants and Tax Agents Institute NZ Annual Conference
Marlborough Convention Centre, Blenheim
8 March 2013
Thank you for inviting me to address you again this year.
I have attended your annual conference for some years now and this is your first under your new name.
I think the change is a good one as it represents your membership more accurately and brings the organisation more in line with your very laudable objectives.
As Revenue Minister I am, of course, particularly pleased to see that you include as objectives, your intention to foster tax knowledge and further tax practice in New Zealand.
It is good for any organisation to be responsive enough to meet a change and be able to adapt accordingly.
The tax system too needs to be adaptable enough to respond to changing conditions.
The 2010 Budget brought much-needed change to the tax system by shifting the taxation focus from income to consumption and aligning the top tax rate and the trustee rates.
By cutting income tax rates and increasing GST as well as removing depreciation deduction on buildings, the government has made the tax system fairer and less open to abuse.
For a system such as ours which relies on voluntary compliance, this is absolutely critical, and I acknowledge the role that tax agents play in assisting with compliance.
The tax switch from income taxes to GST had another effect too.
Taxes on personal income tend to be more distorting than GST.
Taxes intrude on decisions and tend to encourage individuals and businesses to do things that would not be sensible in the absence of tax decisions.
So the tax switch was aimed at making the tax system less distorting which increases the size of the New Zealand economic cake.
The government has an ongoing programme of maintaining a broad-base, low-rate tax system that does as little as possible to distort the decisions of businesses and individuals.
We want New Zealand to be a good place for businesses to locate and for individuals to live and work.
For that we need to continue to maintain the tax system, ensuring that our tax laws continue to be effective and this requires a constant process of tax changes supporting our broad-base, low-rate tax system.
Looking to immediate future, changes on the policy front will be small — no changes are envisioned to the basic tax frameworks as they are fit for purpose.
So the tax policy work will instead focus on improvements within the current framework aimed at supporting the Government’s ambitions for the economy and intention to ensure fairness in the tax system.
There is still plenty of work to do on this and I will talk more about this later.
I would also like to discuss today an area of importance to you and one which will see big changes: our tax administration, as we strive to ensure it provides best possible value for money.
And of course, an area of constant change is the global economy.
I am sure you are aware of the recent media attention paid to whether or not large multinational corporates are paying their fair share of tax.
To help with that, we need to ensure our tax system is adaptable — keeping pace with, if not actually leading international best practice.
Ongoing maintenance of our tax system is important as it is crucial for supporting the Government’s objectives.
The Government aims to lift New Zealand’s economic performance with careful economic management, lifting national savings and encouraging investment.
New Zealand must protect itself from offshore economic turbulence and for that, we need a solid buffer of capital providing businesses with the investment funds they need to grow, provide jobs and contribute to the economy.
As I said before, all taxes are likely to distort decisions and thereby have an impact on the national economy to some extent.
We therefore need to raise taxes in ways which do as little as possible to discourage sensible decisions by individuals and businesses within our broad-base, low-rate framework.
And efficient and fair revenue collection reduces the need for borrowing which is good for the economy.
The focus is on addressing inequities and anomalies in the tax system which strengthens the system while also continuing to collect revenue efficiently.
Changes are already in train, and you may be aware of some of these.
Some such changes are in a bill currently before the Finance and Expenditure select committee, the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Bill.
The bill contains a proposal to tighten the rules for deducting costs of mixed use assets such as holiday homes, boats and aircraft that are used by the owner, both privately and to earn income.
It is important to address this situation as there is a fairness question here, as well as the economic efficiency concern of reducing artificial tax biases in the way that people invest, so that New Zealand’s capital is invested more productively.
Retaining the status quo means that the owners of such assets effectively receive a taxpayer-funded subsidy for the asset.
The proposals in the bill address these concerns by limiting the tax deductions that can be claimed on mixed use assets to better reflect the business and private use of the asset.
The apportionment approach that was chosen should be reasonably easy for most people to apply.
The proposals, however, do get more complicated if the asset is held in a company.
This is necessary to ensure that owners cannot claim excessive interest deductions.
The Bill is currently being examined by the select committee and I am confident they will carefully consider whether an appropriate balance has been struck between integrity of the system and complexity.
It is important too that tax does not get in the way of efficient businesses being set up in New Zealand.
Our current GST laws can present an obstacle to that and we need to address this to stay globally competitive.
GST is a tax on consumption—not a tax on business and therefore should be neutral for both resident and non-resident businesses.
The Bill proposes to allow non-resident businesses to register for, and claim back, GST in a broadly similar way to a resident business.
You may also be aware of the proposed salary trade-off changes which will mean that car parks provided to employees (predominantly in Auckland and Wellington CBDs) will be taxed, through the fringe benefit tax rules.
The change will enhance the integrity of the tax and social assistance systems by providing a fairer, more equal, way of treating those who receive non-cash benefits as part of their remuneration compared with those who receive only cash remuneration.
I would like to turn now to matters that could well be much more significant for many here.
A current tax policy project concerns taxation requirements for financial reporting.
Presently all companies except shelf companies have to prepare financial reports under the auspices of the Financial Reporting Act.
Medium sized companies have to prepare these reports to GAAP standard.
As part of a much wider set of reforms, Government has agreed that for companies that are not large and that have not borrowed monies from the public, this Financial Reporting obligation will be replaced by a tax administration requirement.
That means that these companies will prepare special purpose financial statements to a minimum level — double entry accrual based, with explicit notes requirements.
Inland Revenue is interested in this because it is the biggest user of financial statements in New Zealand — it uses them both for audit and debt purposes, and in some situations needs them to fulfil its international obligation under tax treaties.
There is a case that all businesses should have to prepare financial statements — Inland Revenue is likely to propose that, subject to a de minimus, all businesses and taxpayers that make significant losses should prepare these financial statements.
I look forward to your organisation’s response to these proposals.
This will be further discussed in the Inland Revenue presentation.
As you know, Inland Revenue aims to transform its business to provide better value for money across the vast range of activities it performs and in line with Government’s expectations for the public service.
The catalyst for change at IRD is the performance of the department’s now rather dated computer system, FIRST which now, in addition to tax, is also called upon to administer Child Support, Student Loans, Working for Families and KiwiSaver.
Each has inevitably placed their own pressures on the system.
At the same time, taxpayers, both corporate and personal, have been calling for a more interactive system to enable them to better manage their tax affairs online, a little like the way we do our banking these days.
FIRST however has restrictions and this has implications for the efficiency and effectiveness of our tax administration, not to mention imposing restrictions on policy development.
But the change being contemplated at Inland Revenue is not merely a technological one.
For a modern tax administration to keep pace with taxpayers’ service expectations, we need more than a new computer, but also fit-for-purpose business processes that lower compliance costs and make it easier for customers to deal with them.
The department will also need to be able to work across government.
My view is that Inland Revenue needs a focus on providing an environment that supports business and to continue to focus on providing value for money.
It will also mean asking “what is the best use of our time” and moving staff from lower value to higher value tasks.
As tax agents you can probably think of a number of areas for improvement and I imagine that through the transformation process, the department will want to hear your views.
Personally I feel that one example would be to improve the PAYE system, with a particular focus on the Employer Monthly Schedule.
This schedule provided to Inland Revenue by all employers is a key payment and data collection mechanism within the overall tax system.
It performs a hugely important function, yet it is inflexible and cannot accommodate changes and more importantly, it is not particularly user-friendly.
A fundamental issue with it is that it is labour-intensive, often requiring double-handling and repeat contacts from IRD, thus making it a significant burden on employers.
Inland Revenue is conscious of this, and makes efforts to help.
By contacting employers with overdue employer monthly schedules, last year they reduced the number of employers with overdue schedules by 24%.
This is good, because it means those businesses have avoided penalties and interest, but this approach is not the solution.
To avoid repeat contacts from Inland Revenue and double-handling, we need a much greater reliance on electronic media and a system which allows accurate, validated information from employers at the first interaction providing near real time confirmation and improved status reporting.
I think that what would be most helpful for employers would be if such a system were integrated as part of their everyday business systems, reducing the amount of time they spend on PAYE obligations and interacting with IRD.
I want this to succeed — I want the best possible tax system delivering the best possible service to taxpayers.
Where tax agents are concerned, I would see this tax system providing:
- more personalisation, for example, tailored interactions
- greater certainty through up-front validation of information and tracing interactions with IRD
- better responsiveness as Inland Revenue’s processing times improve
- less paperwork through two-way interactions between Inland Revenue’s and tax agents’ systems
- more time to provide business advice, rather than engaging with Inland Revenue for simple tax administrative matters.
The next few years, will be an exciting time for the department and the tax community and will be your opportunity to influence the shape of the organisation and indeed of the whole of government for generations to come.
I encourage you to take up that challenge, and participate in the process of change.
The Government is concerned that we approach this change programme with careful consideration.
Later this month the Cabinet will consider Inland Revenue’s business case for the overall direction of the transformation programme.
But in the meanwhile, the world keeps turning and events at home and abroad demand a response.
Grabbing headlines recently has been the issue of certain large multinationals who appear to pay no or little tax anywhere in the world.
We are not alone in our need to respond and New Zealand is actively contributing to OECD efforts to identify what needs to be done and how this will be implemented around the world.
Like other countries, New Zealand already uses a range of measures to address the issue, including information exchange agreements with other countries, withholding taxes, transfer pricing rules, thin capitalisation rules and in certain cases, our general anti-avoidance rule.
I might add that our tax rules and their enforcement by Inland Revenue are very well regarded internationally.
Be that as it may, times are changing and the rules need to evolve and adapt to suit.
The problem is that tax rules around the world were largely designed for an industrial world and the rules have had trouble keeping up with new business models and technologies in the internet age where companies are not constrained by location or national borders.
The OECD work will help New Zealand and other countries to identify any weaknesses in their rules and to ensure that international tax frameworks keep pace with new business models.
From the heady world of the OECD and multinational corporates, I would like to turn to hard reality.
Last week a drought was officially declared in Northland.
And this week, drought was also declared in South Auckland, Waikato, Bay of Plenty and Hawke’s Bay.
For a country like ours for which farming is the backbone of the economy, this is bad news.
I therefore am pleased that Inland Revenue has been able to offer some assistance to affected farmers by exercising its income equalisation discretions in all of these affected areas.
Those of you with farming clients will be familiar with the Farm Equalisation Scheme which was set up to help farmers cope with fluctuations in their incomes.
The scheme allows farmers to deposit money to be put aside from a better year and withdrawn against a not so good year, and farmers have to make their deposits by a specific date.
Inland Revenue has decided to relax the rules for the cut-off date to allow late deposits from the 2012 income tax year to be made up to 30 April 2013, regardless of when the 2012 tax return is filed or the due date for filing that return.
Also early refunds will be allowed.
What farmers really need is rain and lots of it.
What the tax system offers is some compensation which will better equip farmers to plan their financial response.
It is an example of the tax system being adaptable enough to respond to changing conditions — bringing me full circle to the starting point for my discussion today.
Tax may be deeply absorbing to many here so I hope that I am not offending anyone when I say that tax is a drag on the economy.
Yet taxes are necessary, and the work that you do in helping with the efficiency of the system is invaluable.
The tax system requires ongoing changes to ensure efficiency; collecting the revenue it should while keeping the burden of compliance costs to an absolute minimum because the Government is focused on supporting businesses to help grow our economy.
Maintaining our broad-based, low-rate tax framework as well as the changes envisioned at Inland Revenue will support this objective.
Your conference programme looks an interesting one, and one in keeping with an organisation striving to lift the knowledge and practice of tax professionals.
I wish you a successful conference, thank you very much.
Mark Stewart | Press Secretary | Office of Hon Peter Dunne
Minister of Revenue | Associate Minister of Health |
Associate Minister of Conservation | Member for Ohariu
DDI +64 4 817 6985 | Mb +64 21 243 6985