1. The policy development process
Since 1994, tax policy has been developed in accordance with the Generic Tax Policy Process (GTPP). This is a very open and interactive process which helps ensure that tax policy changes are well thought through. A good tax policy process is an essential ingredient for a good tax system. We believe that the GTPP is a good process which is valued by the private sector. You should be aware that the consultation that takes place under the GTPP will add to the time it takes to develop tax policy but this helps towards good and stable policies being developed.
As part of the GTPP there is a published tax policy work programme. Developing a new work programme will be a top priority early in the New Year. There are also a number of tax bills that have lapsed with the dissolution of Parliament prior to the election. Ministers will need to reconsider their reinstatement.
The tax policy consultative process
The GTPP was introduced to ensure better, more effective tax policy development through early consideration of key policy elements and trade-offs of proposals, such as their revenue impact, compliance and administrative costs, and economic and social objectives. Another key feature of the process is that it builds external consultation and feedback into the policy development process, providing opportunities for public comment at several stages.
Consultation throughout the policy process contributes to greater transparency of policy-making, allowing the Government to set out the policy objectives of proposals and the trade-offs it has made in developing them. Therefore it helps the public to understand the rationale behind Government policy proposals. It also helps to ensure that when Ministers are making policy decisions they are fully informed of different views and can judge them on their merits.
The consultative process cannot, of course, be used for changes that require immediate action to protect the revenue base. It would not be possible to move quickly and, at the same time, to engage in wide consultation on changes to close a recently identified loophole, for example, or to block a scheme that is losing the country hundreds of millions of dollars in revenue.
New Zealand’s tax policy consultation process is well-regarded internationally. For example, the Australian Board of Taxation in its 2007 review of Australia’s tax consultation system, which included a multi-country survey of how consultation is handled elsewhere, made extensive reference to New Zealand’s consultative process. In the course of the review, representatives of the Board visited New Zealand to talk with officials and the private sector about our process, as it was identified as a best practice model on several occasions in its survey.
Within New Zealand, the GTPP is widely accepted as the way to make tax policy, and tax professionals and professional associations expect it to be used, as a matter of course. Indeed, the Australian review cited as one of the main success factors in the operation of the New Zealand system, “a view shared by key officials and external stakeholders that they all need to contribute constructively in the best interests of the New Zealand tax system and economy. This leads to cooperation, assistance and frank dialogue both on parties’ contribution to consultation and other processes”.
The increasing opportunity for consulting on tax policy has resulted in growing numbers of individuals and organisations making submissions on proposed changes, whether these are set out in a consultation paper or introduced in a taxation bill. The downside is that the consultative process makes the process lengthier and requires greater policy, private sector and parliamentary resources.
New Zealand has a private sector which is particularly well informed on tax policy issues. In large part this is a legacy of the open and constructive policy debates that have flowed from the GTPP. There has in the past been less engagement with the academic community than is true for some other countries. In recent years, however, this has been changing. Victoria University together with Inland Revenue and the Treasury organised a conference on tax policy in February 2009 which brought together a set of international experts to consider possible fundamental tax reforms for New Zealand. This led to the formation of the Tax Working Group (TWG) which drew together leading tax practitioners, academics and tax officials to debate tax reform options. The TWG reported to the Government in January 2010. This was a time-intensive major review of taxation both for policy officials preparing papers for the Group and for the individual members of the Group. But it provided an opportunity for very open debate on major tax policy reform options. It helped guide tax reforms in Budget 2010.
Other bodies have also considered tax policy issues as part of a wider set of policy issues. These have included the Job Summit, the Capital Market Development Taskforce which reported to the Government in December 2009 and the Savings Working Group which reported in January 2011. These wider bodies have also considered important tax policy concerns. These can be challenging to work through quickly because tax changes are often very difficult to examine on a one-off basis. Because tax policy changes can affect the overall coherence of the tax system, a detailed understanding of the tax system and how it fits together is necessary to understand the full ramifications. Servicing these various committees has absorbed an increasing amount of tax policy resources.
Developing a new tax policy work programme
One of the first steps for the new Government in relation to the GTPP is to develop a three-year revenue strategy that is effectively linked with the Government’s economic and fiscal strategy. The next stage is the development of a rolling tax policy work programme that gives effect to the revenue strategy. At present, the work programme covers an 18 month period.
Developing the work programme involves scoping broad policy proposals and prioritising and sequencing the development of initiatives. We also look at budgeted resource requirements, the time needed to develop, legislate for and implement initiatives, and the modes of consultation and communication to be employed throughout the process.
This stage of the GTPP culminates in a joint report by the Policy Advice Division of Inland Revenue and the Treasury to the Minister of Finance and Minister of Revenue recommending a tax policy work programme. Once approved, the work programme becomes a detailed tax policy plan between the Government and the two departments. We will be reporting to you and the Minister of Finance on possible measures for the tax policy work programme early in the New Year.
The work programme is generally made public, attracting strong interest from the tax and business communities, to whom it provides greater certainty and an understanding of the Government’s direction in tax policy.
As time passes and the work programme is updated, and new policy initiatives are added to it, there is a risk that there will be more items on the programme than can be progressed during the 18-month period. It is therefore important that when items are added to the work programme, existing priorities are reviewed to ensure that the Government’s expectations across the work programme are met.
The work programme in recent years
To reflect Government priorities, the focus of the tax policy work programme over the last three years has been on lifting productivity and growth and reducing New Zealand’s vulnerability to economic shocks. Tax reforms have focused on improving incentives to work, save and invest, improving the fairness, coherence and integrity of the tax system, boosting New Zealand’s international competitiveness and helping to ensure that we deliver a good tax system that is “value for money”. In addition, an urgent priority was responding quickly to make sure that the tax system was not impacting unfairly on taxpayers affected by the Canterbury earthquakes. Work programme priorities over the last three years have included:
Budget 2010. This was a significant tax package that reduced income tax rates across-the-board, increased GST and broadened the tax base in a number of areas (including the removal of depreciation on most buildings). The package was designed to be broadly revenue neutral, with the GST increase and the base-broadening measures paying for the income tax rate reductions.
Business transformation. This involves moving from Inland Revenue’s current paper-based tax administration system to a more electronic and smarter administration. Various streams of work have taken place, including changes to the treatment of student loans and changes to secrecy and privacy rules.
Servicing groups considering tax reform measures. These have included the Jobs Summit, the Capital Market Development Taskforce, the Tax Working Group and the Savings Working Group.
International Tax Review. This has involved extending an active business exemption to New Zealanders that have significant but non-controlling interests in foreign companies, tax changes to remove the 2% Approved Issuer Levy that applies to non-resident investments in certain widely issued bonds. These measures are contained in the Taxation (International Investment and Remedial Matters) Bill introduced in October 2010. In addition, New Zealand has signed double tax agreements with Australia, the United States, Singapore, Turkey and Hong Kong.
Child support. This has involved changes to the child support rules to reflect better the actual cost of raising children today and to take account of the degree of shared care between two parents and the income levels of both parents. These measures are contained in the Child Support Amendment Bill introduced in October 2011.
Income sharing. The Taxation (Income-sharing Tax Credit) Bill, which proposes that each partner in a relationship caring for children under 18 be taxed on an equal share of their combined income was introduced in August 2010.
The Canterbury earthquake. Inland Revenue responded quickly to a variety of operational and policy concerns that arose following the earthquake. Various Orders in Council were developed to help those affected, including the provision of interest relief and flexibility on due dates. There were also legislative responses, including changes affecting depreciation, insurance claims, rollover relief, timing changes and income and tax relief.
Developing a new tax policy work programme will be a top priority for both Ministers and officials.
Setting priorities
The work programme must balance the resource requirements of the Minister of Revenue’s main tax policy initiatives against those required for initiatives introduced by other Ministers – for example, in the areas of social policy or sector assistance – which can have substantial tax implications. It must also allow room to meet private sector concerns when tax legislation is identified as causing unintended practical problems. Finally, there is an increasing demand for tax policy resources to be allocated to international tax areas such as OECD work and trans-Tasman tax matters, a reflection of the increasing extent to which New Zealand must take into account international tax trends in setting its domestic rules.
Given the many areas of Government policy that have tax implications, the complexity of tax issues and the finite resources available to deal with them, it is essential for Ministers to discuss and set out their tax policy priorities. Since many areas of government raise important tax policy issues, the allocation of tax policy resources is likely to affect the Government’s ability to use tax to pursue non-tax policy objectives, especially in economic development and social policy. It is therefore desirable for Ministers in those areas to be clear about the implications for the tax policy work programme of policy developments in their portfolios.
The legislative programme
Five bills lapsed with the dissolution of Parliament on 20 October in anticipation of the general election. These are the:
- Taxation (Annual Rates, Returns Filing, and Remedial Matters) Bill introduced on 14 September 2011. The bill covers changes to returns filing and record-keeping requirements, an increase in the minimum employee and employer contribution rates for KiwiSaver, and the deductibility of expenditure on software development if the software cannot be used and the project is abandoned. The bill has had its first reading and has been referred to Select Committee.
- Student Loan Scheme Amendment Bill introduced on 7 September 2011. The bill covers changes to improve the efficiency and fairness of the student loan scheme and encourage borrowers to take greater responsibility for their loan repayments. It includes measures to improve current loan repayment levels, removes the ability to offset losses against a borrower’s net income, reduces the repayment holiday period to one year, and requires borrowers to apply for the repayment holiday. The bill has had its first reading and has been referred to Select Committee.
- Taxation (Income-sharing Tax Credit) Bill introduced 16 August 2010. The bill provides for the sharing of income for tax purposes by a couple who are caring for children. The bill has been reported back by Select Committee and is awaiting its second reading.
- Taxation (International Investment and Remedial Matters) Bill introduced on 26 October 2010. The bill continues the reform of New Zealand’s international tax rules by allowing an active income exemption for joint ventures and other significant New Zealand shareholdings in foreign companies that are not controlled by New Zealand firms. The bill has been reported back by Select Committee and is awaiting its second reading.
- Child Support Amendment Bill introduced on 5 October 2011. The bill covers a range of changes to improve the scheme, including changes to the child support formula and to the rules relating to payment, debt and penalties. The bill is yet to have its first reading.
If not reinstated, these bills will lapse. Ministers will need to consider the reinstatement of some or all of these bills when Parliament reconvenes.