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Inland Revenue

Tax Policy

PUBLISHED 19 September 2013

Address to NZ Payroll Practitioners’ Association

In his speech to the NZ Payroll Practitioners’ Association today, the Minister of Revenue discussed some of the recent changes to the tax system and administration and also possible future changes. He also talked about the importance of maintaining stability during change. For more information see the Minister’s speech.

Hon Todd McClay
Minister of Revenue

19 September 2013

Address to the NZ Payroll Practitioners’ Association Annual Conference

Thank you for your welcome and thank you inviting me to speak to you.

Since your last conference much has changed. Most obviously is the fact that you have a new keynote speaker. I hope I can live up to the high standards set by my esteemed colleague and predecessor, the very able Mr Dunne.

He spoke highly of you and of your conference, describing it once as “where the rubber of the economy hits the road”.  By that he meant that in Wellington, ensconced in the Beehive, we might devise exciting new ideas for the economy, but right here is where we see it played out in the real world where payroll professionals discuss implementing those policies.

Your work is at the very heart of our economy — the reason why we all go to work — people getting paid to do their jobs. I think Mr Dunne was right, and taking my cue from him, I look forward to a long and fruitful relationship with you.

For me, the past few months have been a steep learning curve as I get to grips with all the changes I need to accommodate in my new portfolio. But while I am coming to terms with changes, I still need to keep on top of the day to day requirements of being Minister of Revenue.

The Revenue portfolio is a very busy one with a steady stream of legislative reform going through  the House at any one time. It’s easy to get caught up in the excitement of the new changes, but it’s important to ensure that the business as usual work keeps going during periods of change.

And that’s what I’d like to talk to you about today.

Business transformation

Some of you may be aware of Inland Revenue’s transformation programme.

It’s an ambitious project and as I look into the way that Inland Revenue operates and the changes that it is contemplating, I am struck by the magnitude of the possible changes. But I am also deeply conscious of the fact that in the face of all this change, it is crucial to ensure that the business as usual work continues.

I know that Mr Dunne has spoken to you in the past about the need for change so I won’t go into that again. We’ve all read the news reports about Inland Revenue needing a new computer system. The truth is that IT changes are just a part of what Inland Revenue is contemplating. I’ll come back to that later.

Managing change

It must be said that Inland Revenue has a good reputation for modernisation and managing change. I was interested to see that back in 1994, Inland Revenue was being congratulated on its successful implementation of its (then) ground-breaking FIRST computer system.

Yes that’s right: back in the early 90’s FIRST was considered a marvel amongst tax administrations and the department hosted a number of international delegations who came to New Zealand to learn from it. Quite rightly, it was a very big deal at the time, representing a major shift in how Inland Revenue managed the tax system.

And remember, FIRST did not happen overnight – it was phased in over 5 years.

There undoubtedly were teething problems –it’s almost inevitable in such large projects, but the important thing is that it was successful – surpassing even the original designers’ expectations, as it now manages more than just tax, Child Support, Working for Families and Student loans but also KiwiSaver. But the world keeps turning and customer expectations evolve and therefore service delivery must adapt.

In the face of great change, some things still stay the same and I might say; must, stay the same. Tax must continue to be collected. And to keep the machine running smoothly, ongoing repairs and maintenance have to be carried out on the tax system, that is, to the operating system (FIRST) and the legislation. 

This ensures that tax continues to be collected fairly and efficiently, and people receive their entitlements correctly. It is absolutely crucial that this work continues in the background. It is this that will ensure our success.

My job, as the Minister of Revenue therefore, is primarily to oversee the development of fair and efficient tax policies which will deliver the necessary revenue to fund government services and support the Government’s objectives for the economy.

The tax system

The objective is not to collect as much tax as possible, but to collect the fair and correct amount from each taxpayer, and it needs to do it efficiently so as to minimise costs on the taxpayer.

Taxation and the tax system have to be both fair and efficient. The Government’s focus in the tax system following the Financial Crisis has been on maintaining a stable revenue base. In times of economic adversity, it is necessary to ensure that government revenue is protected because certain government services and functions must continue; preferably without having to borrow to fund them. That approach will see the Government’s books return to surplus, not through wholesale tax grabs, but by diligently ensuring that most people pay the tax that is due.

It has been suggested that the financial woes of some states in the EU stem from an overly relaxed attitude to debt, imprudent spending and a proud tradition of tax evasion. For example, I remember reading of a Greek tax collector who, on arriving to conduct an audit was confronted by a whip-wielding Athenian! Indeed, Christine Lagard of the IMF has expressed the view that Greece can help lift itself out of its economic woes by simply paying its taxes.

The reason we’re in a better position here in New Zealand where most people recognise the value they receive in return for their taxes and most people comply with their tax obligations voluntarily is because they see that generally the tax system is fair. Our tax system with its low rates and a broad base is a sound and equitable approach to taxation and is much admired internationally.

We will continue to refine and improve, but generally, our tax system is just about right. The focus must now be on modernising our tax administration – that is ensuring that it fit for purpose for the 21st century.

I will be releasing details of the updated tax policy work programme once it is agreed. Those details haven’t been finalised yet, but I can tell you that we will continue with the broad base, low rates approach. And an important aspect of the policy work programme will focus on ensuring that we have the appropriate tax administration and legislative framework to support and enable the transformation of Inland Revenue. This is work that has been in train for some time.

What we’re already doing

In some ways, the future is already here. Today Inland Revenue connects with the public in a range of ways. Inland Revenue is already embarking on many of the changes that will fundamentally change and simplify the way New Zealanders engage with the tax system. Taxpayers can already manage a range of tax transactions online. Around 1.6 million taxpayers for instance, are self-managing their tax affairs online through myIR, which is a web portal.

If you think back to when you began your career, it was a different world wasn’t it? With a lot of paper. I’m sure some of you here may remember life before the Employer Monthly Schedule (or EMS) and electronic communication with Inland Revenue. Some of you will remember the tedious business of getting employees to fill in IR 12 forms and then sending those on to IRD at year-end as part of the annual payroll reconciliation process. 

Now this information is provided monthly via the EMS and Inland Revenue completes the summary of salary and wage details for each employee at year end.

Changing to the EMS was a big change. Maybe it’s time to make another change.

Improving PAYE

The PAYE system is a marvellously simple theory yet in practise, it consumes a great deal of your time. PAYE and ESCT account for around $21 billion of government revenue, so clearly it’s hugely important that it functions smoothly and efficiently.  But I’m sure no one here would describe PAYE as efficient as it could be, would they?

I know, from talking to many people that the Employer Monthly Schedule, central to the PAYE system, is responsible for a great deal of rework. 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%. That’s great of course, because it means those businesses have avoided penalties and interest, but this approach is not a smart solution.

So that makes the EMS a prime candidate for a makeover. And I’m really talking about an extreme makeover.It really is timely that Inland Revenue is looking atstreamlining PAYE – making sure that systems are designed to make it as easy as possible for employers to share the information they need to with Inland Revenue. 

If the purpose of the EMS is to provide employment information to Inland Revenue to administer the tax system, why can’t your payroll system provide that information digitally? At a single stroke, we’d greatly improve the efficiency of a major vehicle of the tax system and reduce compliance costs for employers.

We’d achieve this through 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. Because while an efficient tax system can have benefits for an economy, in order to be most beneficial, the task of collecting tax needs to be as simple and efficient as possible.

We realise that introducing such a thing would require wide consultation and close collaboration with software developers. We’ll be kicking off that consultation soon and software developers and payroll providers will be key groups we want to talk to and hear views from. It’s a sign of the times that an important relationship for Inland Revenue these days is with your software developer to keep them informed about changes and to implement the annual changes required for meeting payroll obligations.

The department will be looking to engage with New Zealanders and business on the changes to ensure that the tax administration system reflects your needs and expectations.

This will be crucial for Inland Revenue’s delivery of its business transformation.  I can assure you now that you will be hearing from us over the coming months. 

Public service efficiency

But innovation is not just about flashy IT projects. Necessity, as the cliché has it, is the mother of invention. Following the Canterbury earthquakes we found that government agencies can be very flexible and find new ways to work if need be.

So for example, we found courts being convened on marae and different agencies, like Work & Income and Inland Revenue working together to provide frontline services to those in need. That spirit of the public service working more cohesively together is to be encouraged and legislation has been passed which provides for greater sharing of information between Inland Revenue and other government agencies, subject to a range of restrictions.

It makes little sense that a person dealing with a number of different agencies has to provide the same information to each agency. Sharing information is therefore a rational and efficient way for the public to interact with the public service.

There is a cost to collecting taxes, a cost which of course is borne by the taxpayer, so anything which reduces Inland Revenue’s costs is good for the taxpayer and consequently, the economy. Careful sharing of information seems like a very useful way of making the public service function more efficiently — most recently, public consultation has occurred on the topic of sharing information with justice agencies in order to combat serious crime!

Next steps

So what happens next?

Last month I launched the next phase of Inland Revenue’s Transformation programme to the market. This is a significant step because the transformation of Inland Revenue will require the expert services of many people from a range of industries over the next decade.

I’ve already mentioned the possible overhaul of how PAYE information is provided to Inland Revenue. If this were to proceed it would be one of the first items you as payroll practitioners would see off the blocks. A range of other initiatives would be rolled out over the decade in four stages.

Exactly how and when that would occur, I cannot say. This is something that the Department will have to work through in conjunction with all interested parties such as yourselves.

What I can say is that if using 20 year old technology the department could deliver all the innovative forms of service delivery we now use and keep itself at the forefront amongst international tax jurisdictions, just imagine what could be achieved in the current transformation over the next ten years.


So in drawing to a close, let me say that taxes are necessary, and the work that you do in making PAYE deductions 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 payroll professionals.

I wish you a successful conference.

Thank you.


Media contact: Rob Eaddy 027 459 6200