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Inland Revenue

Tax Policy

PUBLISHED 20 June 2013

Minister's address to Central North Island EMA payroll conference

Revenue Minister Todd McClay addressed the inaugural Employers' and Manufacturers' Association Central North Island Payroll Conference in Rotorua. In his speech he described the policy development process and some current areas of focus for tax policy.

Hon Todd McClay
Minister of Revenue

20 June 2013

Address to the EMA Central North Island Annual Payroll Conference, Novotel Hotel Lakeside, Rotorua

I’d like to thank you for inviting me to join you today.

As the Member for Rotorua and the Minister of Revenue, it is especially appropriate that my first speech to a conference in my new portfolio is to you today.

While the portfolio is new to me, I am no stranger to the world of tax, having served on Parliament’s Finance and Expenditure committee (known in Wellington as the FEC).

Through my involvement with the FEC I have come to take greater interest in tax matters so I was really pleased that the PM asked me to take up the portfolio of Revenue Minister.

You have invited me here to discuss tax policy and I am sure there are many in the audience today who would be able to set me straight on a number of tax technicalities.

That’s a good thing, because one thing I have quickly spotted is that there is a direct link between tax policy and the work that you do.

The policies that I announce as Minister of Revenue will (all going to plan) in due course become law and people come together here to discuss their implementation.

So you are clearly interested in getting to grips with tax legislation.

Not many are, sadly.

Tax may not be glamorous, but tax changes affect us all in some way so it is in our own interests to take note of proposed changes and express your opinion.

Because the really good thing about how tax policy is developed in New Zealand is that it allows and even seeks and considers your views on proposed changes.

It is appropriate that this is your inaugural conference because as a starting point for a discussion about tax, I would like to talk to you today about the process whereby an idea becomes a proposal and then makes its way into tax law.

And as one cannot talk about tax changes without discussing last month’s Budget, I will also touch on changes announced in the Budget.

But my starting point is perhaps the obvious: what are the Government’s objectives for tax policy?

Government’s objectives

I appreciate that when tax policy changes are announced, it can have implications for you good people gathered here today.

The Government collects around 55 billion in tax revenue each year.

Of that, 39 percent of its revenue — that’s around $21 billion in the 2011/12 year — comes through Pay As You Earn (PAYE) and Employer Superannuation Contribution Tax (ESCT).

And the fact that the vast majority of that is handled quickly, efficiently and with minimal fuss through payroll systems is a testament to your work.

The Government is very appreciative of your work and I want to assure you that we do not embark on changes lightly.
As I said before, tax affects all of us so it’s important that the tax system is managed carefully.

Unwise tax changes can see 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.

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 in 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.

This requires a constant process of tax changes supporting our broad-base, low-rate system.

Looking to the immediate future, I do not envisage changes to the basic tax frameworks as they are fit for purpose.

By that, I mean that the tax system does what it is meant to do and does so relatively efficiently — and that is to collect and dispense funds as appropriate.

Tax policy work will instead focus on improvements within the current framework aimed at supporting the Government’s intention to ensure fairness in the tax system and its objectives for the economy.

New Zealand must prepare itself to deal with economic shocks — whether they arise from offshore as in the case of the Global Financial Crisis or domestically as with the Christchurch earthquake and the recent drought.

For example, the Minister of Finance has estimated that the cost to the economy of the drought could be as much as $2 billion.

To absorb such blows it is important that the Government maintains a strong balance sheet, which means we must have a robust revenue base to finance government spending.

The Government remains on target to return the government’s books to surplus, and it is achieving that through careful economic and fiscal management.

Getting debt under control and reducing our over-reliance on foreign debt are the most important things we can do to steer us towards a more secure economic footing.

So it is important that New Zealand maintains robust taxes to finance government spending in ways that are as fair and efficient as possible.

The Government has resisted the impulse to raise revenue by imposing new taxes or raising tax rates.

Instead, it is taking a responsible approach to raising revenue by addressing inequities and anomalies in the tax system to strengthen the system while also continuing to collect revenue efficiently.

It does this by removing loopholes in the existing tax bases to reduce investment distortions and increase fairness so that the tax burden is spread more evenly.

It is also putting more focus on enforcing current rules.

Budget 2013 was a good illustration of this approach.

Budget 2013

Budget 2013 had a focus on building a more competitive and productive economy, and a return to surplus in 2014/15.

Our expected return to surplus in 2014/15 which, incidentally, makes New Zealand almost unique amongst developed nations is being driven in large part by recovering tax revenues.

Core tax revenue receipts are currently ahead of expectations and are being driven, in part, by a bigger company tax take as our economy continues to grow.

So let me assure you, that as the new Revenue Minister, I am not anticipating any radical shifts.

This is no time to abandon a formula that is working and the announcements made on Budget day are a continuation of the theme the Government has adopted over the four previous Budgets; namely, to protect the revenue base and make the system fairer to all taxpayers.

The Budget has new spending of $900m but the big focus is on better quality spending rather than more spending.

I am sure you are all well aware of the main tax announcements, but to recap, they were:

  • A proposal to allow tax losses arising from R&D expenditure to be accessed early by small start-up firms which supports the government priority of building a competitive economy. A consultation paper is to be released later this month.
  • The announcement of a base protection measure to tighten the thin capitalisation rules to limit interest deductibility, particularly where a group of non-residents are acting together.
  • Increased funding for Inland Revenue to continue its compliance focus on property investment. A consultation paper has also released seeking feedback on proposals to clarify the date of acquisition of land to help determine if it has been acquired with an intention to sell.
  • And an announcement of a proposal to provide tax relief for six areas of black hole expenditure by making them either deductible or depreciable.

All in all, a continuing focus on ensuring that the taxes which currently exist are applied fairly and equitably.

It is in this context that officials develop tax policy which supports the Government’s objectives.


By and large, our tax policy development process is widely recognised as good, open and consultative.

But it has not always been the case.

It used to be that the tax policy development process was not formalised.

Some tax policy was effectively designed in a vacuum, while other proposals were extensively consulted on; the introduction of GST is an excellent example.

Businesses were sometimes taken by surprise by tax proposals — the infamous entertainment tax announced on Budget night 1992 is a prime example of this.

That type of approach understandably left the business community in quite some uncertainty as to the direction of tax policy and even the thinking behind policy changes.

I imagine payroll people had to scramble to keep up with tax changes.

This patchy approach to consultation was inefficient and consequently produced tax policy of variable quality.

A review of the process recommended some profound changes.

Firstly the Review addressed the issue of practicality of tax proposals and recommended that the tax collection agency have a more prominent role in developing tax policy.

It meant that tax policy could be developed in the context of real world considerations for the practicalities of implementing law changes.

Along with that change came the introduction of what is known as the Generic Tax Policy Process (or GTPP).

The principal feature of GTPP is public consultation – allowing the public to have a say on proposals early in the development process to try to ensure that tax policy is workable and that compliance costs are kept to a minimum.

The new approach recognised that the best policy was produced when there was adequate consultation.

There are times when certain tax policy proposals are not subject to consultation prior to any amending legislation being introduced into Parliament.

For example, on occasion the Government may need to act swiftly to close a loop hole, however, businesses will usually have the opportunity to express their views through the select committee process.

Changes are now much more extensively consulted on – I imagine there are some here today who will remember the introduction of KiwiSaver, for instance.

Today New Zealand’s generic tax policy process is upheld as an example of how to do good tax policy and is emulated by other countries.

Even so, very few countries today run as open and transparent a process for developing tax policy, where taxpayers can have real influence over the design of a policy.

Consultation process

Typically in New Zealand, formal consultation runs for six weeks.

After that period, officials assess feedback received and will, if necessary check back with submitters to clarify points.

Frequently the draft proposal is amended in response to feedback.

The proposal is then written into draft legislation.

Once it is referred to the Parliamentary select committee, submitters have a second opportunity to comment by providing evidence directly to the Finance and Expenditure committee.

As an aside, as the former Chair of that select committee I have been impressed by the number of people who take the time and effort to make a submission.

I fully appreciate that tax legislation can be complex, but that should not daunt you.

I have seen that Inland Revenue officials are committed to the consultation process and try to be helpful by explaining matters as clearly and simply as possible.

The vast majority of tax proposals go through the generic tax policy process and by the time they reach Parliament as draft legislation, interested parties such as payroll professionals, the general public and tax professionals have been consulted and had an opportunity to comment and provide input.

Major concerns will have been considered and reported on to Ministers.

While there will always be areas of disagreement on policy changes, there will have been ample opportunity for the legislation to have been modified to take account of concerns that have been raised in consultation and to ensure that the proposals are more workable.

So GTPP has transformed the tax policy process and provided certainty and good, fit-for-purpose tax policy.

The process is intended to eliminate uncertainty, ensuring that adequate consultation occurs, and that the voice of the public is heard.

Work programme

And to provide extra certainty and remove surprises, every 18 months the Government’s tax policy work programme is published on Inland Revenue’s tax policy website.

I encourage you to have a look at that website and familiarise yourself with the work programme.

In developing the work programme, officials provide advice on proposals based on the Government’s objectives and on feedback from taxpayers.

As Revenue Minister, it will be my joint responsibility, along with my colleague the Minister of Finance, to set the direction for the work programme.

The work programme, I must stress, is not dreamed up in isolation.

The proposed black hole expenditure tax change announced in the Budget is a case in point where the private sector brought a certain matter to officials.

I am not announcing an updated tax policy work programme today — that will be later this year.

There is no particular secret about what the new work programme will incorporate, it is simply that no decisions nor any firm recommendations have yet been made.

I will take some time to listen to others’ views on what should be the forthcoming priorities.

What I can tell you is that we will continue on our broad-base, low-rate framework for the tax system.

We will also continue with measures designed to support economic performance.

And I certainly do not envision any big changes to the tax system.

As I said before, an exciting Budget may not be desirable.

And the same is true for a tax policy work programme developed in isolation.

Lack of clarity about Government’s priorities or the future direction for tax policy spells uncertainty for business.

Today, the tax policy work programme is developed in consultation with the private sector to understand its priorities and issues and the finalised work programme is published on Inland Revenue’s tax policy website.

IRD’s business transformation

Any discussion of the tax system must also include mention of the tax administration.

You have probably heard about Inland Revenue’s transformation programme.

My predecessor, the Hon Peter Dunne saw the need for change and worked hard to drive this programme and I would like to acknowledge his efforts in this regard.

Mr Dunne saw that customer service expectations were changing and that the role of the department itself had evolved.

Today Inland Revenue is the government agency most people deal with on matters from child support to Working for Families, to KiwiSaver and student loans repayments, as well as their tax affairs.

In addition, in response to taxpayers’ service expectations, a growing number of those interactions occur online.

I don’t claim to have an in-depth knowledge yet of how the department operates, but in my view, IRD continues to discharge its duties efficiently and effectively.

However I am also aware that these factors have combined to put pressure on the department’s computer system, FIRST, which in turn is becoming a significant constraint on the department’s operations.

To illustrate this, I am told that it is taking longer to implement the current changes to the child support scheme than it took to implement the original scheme in FIRST in 1991.

But it’s not just a simple question of installing a new computer system.

Our tax system, like other parts of Government, needs to be readily accessible for all New Zealanders – from individuals through to small businesses and large companies.

New Zealanders are getting used to doing many things instantly, easily and on-line – whether it’s booking an air ticket or managing their bank balance.

They want to be able to deal with Inland Revenue as easily as that.

And that means a tax and social policy system that is straightforward to deal with – and well designed to accommodate changing needs and new demands.

Inland Revenue – the way it works and the way it delivers services – must be able to change and deliver in a world that’s moving fast.

It’s our opportunity to build a 21st century tax system that will best serve the needs and requirements of Government and the public.

That’s the work my predecessor set out on, and which I am very excited to be picking up.

Cabinet has approved in principle the case for major change at IRD and asked the department to proceed with more work.

While many details are yet to be worked though, I know that Inland Revenue will be engaging with the business sector and with software developers (the people who build your payroll software) on this and other matters in the future.

As with consultation on tax policy changes, consultation on this will be carried out to ensure that a wide range of views are heard.

Given your important role in the system, I want to make sure your voice is heard.


Which brings me back to consultation and the Generic Tax Policy Process.

I can see the strong value of it and am committed to ensuring that it continues.

What the Generic Tax Policy Process provides is certainty for businesses and better quality policy by allowing business input into the development of tax proposals.

But for the process to work, all parties have to see advantages from taking part in it – if they do not see that they can affect outcomes, the process is damaged.

In our experience, the Generic Tax Policy Process has proved a useful tool for developing good tax policy and for assisting government decision-making, as well as ensuring a large degree of buy-in, or at least an understanding of the policy objectives and what trade-offs the Government has made.

I believe that GTPP provides huge benefits to tax policy formulation in New Zealand and am committed to it, and as part of that commitment, I am keen to strengthen the process and would be interested in any suggestions that you have on this matter.

Because of the part you play in helping to implement tax law changes, it is crucial that you express your views on tax proposals.

Our tax system relies on voluntary compliance.

In New Zealand we have a very high rate of compliance with the tax laws because people believe that the laws are generally fair.

I want to ensure that we continue to have that trust in the tax system and it is my firm view that the GTPP has an important role in building that trust.

I thank you for the opportunity to discuss this with you.