Government fleshes out tax plans
Strictly embargoed to 9 am.
18 February 2000
Government fleshes out tax plans
Finance and Revenue Minister Michael Cullen outlined the Government's thinking on a range of tax matters in a speech today to the Institute of Chartered Accountants conference in Christchurch.
Dr Cullen said the Government would be legislating to counter avoidance of the 39 cent rate and to lower the tax on fringe benefits for workers earning below the $60,000 threshold from which the new rate would apply.
"On the FBT issue, I want to ensure that over-taxation is minimised without substantially increasing compliance costs.
"My thinking at present is that fringe benefits such as cars and loans which can be directly linked to an individual employee should be subject to FBT at a rate which equates with the employee's marginal tax rate.
"My understanding from consultation is that this proposal would resolve some long-standing problems with the FBT regime and is generally favoured, despite the fact that it would entail some increase in compliance costs," Dr Cullen said.
The Inland Revenue Department estimates that up to $250 million of the $1.9 billion the 39 cent tax rate could potentially raise over the next three years will be lost through tax avoidance.
"We will reduce this leakage by anti-avoidance measures.
"One potential problem is that high income earners could avoid the 39 cent tax by substituting salary and wages for employer contributions to superannuation funds which can be drawn on at any time, like a bank account.
"We are looking at two options for dealing with this. One is to cap the value of contributions made by the employer for the employee. Contributions up to the cap would be taxed at the current rate of 33 percent. Contributions above the cap would attract the new 39 cent rate.
"Alternatively, contributions locked into a long-term retirement savings plan could be taxed at only 33 cents while those not locked in were taxed at the higher 39 cent rate.
"The aim is that genuine superannuation savers, even if they are high income earners, will be taxed at 33 cents.
"This incentive may persuade people to increase their superannuation savings, with some loss of potential tax revenue to the Government, but we are not averse to this. One of this Government's policy objectives is to encourage New Zealanders to save more because this will take pressure off the current account deficit," Dr Cullen said.
Work is also underway on mechanisms to discourage people from using service companies or trusts to avoid the tax increase.
"We've been able to draw here on how other countries deal with similar problems although our chosen solution will be tailored to the New Zealand environment. I intend to consult with the relevant private sector groups on the workability of these solutions.
"Subject to the results of the consultation, which I hope to begin next month, the Government intends to introduce a tax bill to deal with the FBT and superannuation scheme issues in late March for enactment by mid-year.
"The FBT changes will come into force with the new 39 cent rate on April 1. The service company legislation is likely to come before the House in May," Dr Cullen said.
EMBARGOED TO 9AM FRIDAY 18 FEBRUARY
18 February 2000
9am, Park Royal Hotel
Hon Dr Michael Cullen
I am very pleased to be here to address this 23rd annual conference of the International Fiscal Association. It sounds like a fun organisation!
As Minister of Finance and Minister of Revenue I am part of a government that is determined to make New Zealand the sort of country we want to live in and are proud to live in. That means a country that is culturally and economically prosperous, and where prosperity is fairly shared.
We are currently developing our fiscal policy framework and budget priorities. These will be released in the Budget Policy Statement in March. We are determined to run a prudent fiscal policy to support monetary policy and take the pressure off the external position.
Our vision for economic prosperity is for a knowledge based, high skill, high income, high employment economy. To do this we need to take a longer-run perspective. In an upswing this means banking the gains from increased revenues and lower cyclical expenditures. The result will be a predictable and stable fiscal policy that will create the conditions for ongoing economic and employment growth.
Tax has an important role to play in this. Obviously, the tax system needs to raise the revenue necessary to fund the schools, hospitals, benefits and services that the government should provide. Equally obviously, the tax system should raise these funds in as logical and efficient a way as possible.
We all want a system of taxation that is coherent, rational and easy to comply with. And I am equally certain that we all want a system of taxation that is fair, even if our perceptions of what is fair may differ slightly.
Thus a key tax policy priority for the Government is to protect the tax base against erosion, to ensure that the necessary revenue flow is maintained. This includes continuing to close legislative loopholes as they arise. It also means pursuing a programme of regular remedial legislation to ensure the law is effective and up-to-date.
It is also vital to maintain the integrity of the tax system, by ensuring that taxpayers meet their obligations, and reducing opportunities for tax avoidance. If that integrity is seen to decline, the voluntary compliance of the taxpaying public is also likely to contract. This would necessitate more audits of taxpayers by the tax administration, increasing costs for everyone involved.
That leads us to another policy priority, which is to minimise the costs imposed by taxation: the economic costs, compliance costs and administrative costs. Further tax simplification -- for taxpayers and the tax administration alike -- has an important role to play here.
These principles are consistent with past tax policy. As a result, you will see a continuation of much of the existing tax policy work programme.
We will also continue the use of the generic tax policy process as a consultative tool in developing policy on major reforms. That process resulted from a recommendation by the committee that reviewed the Inland Revenue Department in 1994, chaired by your next speaker, Sir Ivor Richardson. I understand the process has become widely appreciated in the tax community for the consultative opportunities it provides. It has improved the quality of tax legislation.
Although there will be a lot of continuity in tax policy, there will also be significant changes. Unlike the previous government, this Government does not see tax as just a cost to be minimised. We see government as having a positive role to play in building the sort of country we want to live in, and tax as having an important role to play in that. For example, the tax system can be used to distribute income more fairly. This is one of the main reasons that we increased the tax rate on high income earners. As cuts in pensions helped pay for the last round of tax cuts so the increase in the top rate more than pays for restoring the level of the pension.
As I have made clear in the past, we need to look at the role the tax system should play in tackling the issues of New Zealand's low savings rate and how we can best guarantee decent living standards for the next generation of retirees. Other areas where the tax system may be able to play a positive role are research and development and environmental protection.
We will not return to excessive interventionism in any part of government, including tax policy. But the balance can swing too far in the opposite direction. One example of extreme non-interventionist thinking was the research commissioned by Inland Revenue that suggested we should have a flat tax rate of 22 percent to 23 percent of GDP. I was pleased to see Inland Revenue thoroughly debunk such nonsense in the briefing papers I was given as incoming Minister of Revenue. I commend the department's analysis but question the length of time it took them to conclude the obvious.
Part of the work of the revenue portfolio will be shared with my Parliamentary Under-secretary, Mr John Wright. His key areas of responsibility are the compliance and penalty review, the inquiry of the Finance and Expenditure Committee into the powers and operations of Inland Revenue, and child support legislation. As Minister I shall obviously retain oversight of these areas.
I was part of the FEC inquiry, and I fully accept the need for improvements in Inland Revenue. It is worth remembering, however, that throughout history tax collecting has not been the most popular of occupations. Tax agencies are open to unfair attack, and that attack can be especially destructive when it is cynical and politically motivated. I saw a lot of that on the inquiry.
As a member of the select committee it was clear to me that there are areas where Inland Revenue operates well. But there are also areas where improvement is essential. A well-functioning tax administration is essential to good government, and John Wright and I will work with the department to achieve the changes that are necessary. In that regard I am very interested in any feedback from you about what is required.
One of our next steps will be to introduce legislation to support the increases in the top personal tax rate and fringe benefit tax rate that were enacted just before Christmas. We'll be legislating for two things: one, to counter high-income earners avoiding the effect of the increase in the top personal rate, and two, to lower the tax on fringe benefits provided to low-income and middle-income earners.
As some of you will be aware, we have been consulting with a range of groups about options for dealing with the fringe benefit tax issue. In choosing a workable solution, I want to ensure that over-taxation is minimised without substantially increasing compliance costs. My thinking at present is that fringe benefits that can be directly linked to an individual employee, such as cars and loans, should be subject to FBT at a rate that equates with the employee’s marginal tax rate. By attributing the value of benefits in this way the problem of over-taxation is reduced. My understanding from consultation is that this proposal is generally favoured, despite some increase in compliance costs that would result. I note that resolving over-taxation issues in this way would resolve some longstanding problems with the fringe benefit tax regime.
I would now like to say a few words on the problem of avoidance of the tax increase on high incomes. Much has been made of this issue, some by people in this room. As a government, we have to be realistic. Every additional dollar in tax we collect, by whatever means, is going to be subject to some leakage. This does not justify NOT raising taxes -- nor does it justify reducing them to zero.
Officials delightfully call this leakage "behavioural effects". In calculating the additional revenue we will get from the tax increase, "behavioural effects" were factored in. Very approximately, of the $1.9 billion that could be collected over the next three years, officials estimated that only $1.65 billion would actually be collected. This means the tax increase could bring in as much as $600 million per year, even after allowing for leakage if we made no adjustment to F.B.T. As it is, by 2002-3 we are very confident will exceed our $400M target in the first year. Latest migration data does not, incidentally, suggest a flood of emigrants. I can assure you that money will be put to good use.
We will reduce this leakage by anti-avoidance measures, although this will be offset by the revenue costs of the fringe benefit tax changes. But we will have to be pragmatic: there will be some limited leakage. We are not going to go overboard and increase the company and trust tax rates to counter avoidance. We will rely on the general anti-avoidance rules and other specific rules to counter specific problems.
One of these is the possibility that high-income earners could avoid the effects of the increase of the top personal tax rate by substituting salary and wages for employer contributions to superannuation funds which can be drawn on at any time, like a bank account.
We are looking at two options for dealing with this. One is to cap the value of contributions per employee. Contributions up to the cap would be taxed at the current rate of 33%, and those contributions above the cap the rate would be taxed at 39%.
Alternatively, if the contributions are locked into a long-term retirement savings plan they would be taxed at 33%. But if they are not locked in they would be taxed at 39%.
The aim is that people with genuine superannuation contributions, even if they are high-income earners, will be taxed at 33%. If people increase genuine superannuation contributions there will be some leakage, but the Government is not averse to this.
We're also developing some workable solutions to the problem of people using service companies or trusts to avoid the tax increase. As part of this work we've been looking at how other countries deal with similar problems, though our chosen solution will be tailored to the New Zealand environment. Once again, one of our main concerns in developing such rules is the potential compliance and administrative costs. I intend to consult with relevant private sector groups on the workability of these solutions, and the consultation is likely to begin next month.
Subject to the results of consultation, the Government intends to introduce legislation to deal with the fringe benefit tax and superannuation scheme issues in a tax bill scheduled for introduction in late March, and mid-year enactment. The FBT changes will be effective from 1 April 2000. The service company legislation is likely to be included in a May bill.
On tax avoidance more generally, I'm keen to see the enactment, finally, of the anti-avoidance legislation that has been before the Finance and Expenditure Committee since 1994. It was originally part of a bill introduced in 1994 but was held over pending the outcome of what later became the Wine-box inquiry. The amending legislation introduces further measures to prevent the abuse of foreign tax credits, and it is time it was updated and enacted. Past delay in this area has been purely for political reasons.
The review of GST, which began in 1997, is soon to be completed. Officials have studied the more than 60 submissions received on proposals contained in last year's discussion document, and made their final policy recommendations to the Government. We expect to have made final decisions on the proposals by early next month, and to include resulting legislative changes in a tax bill to be introduced into Parliament in May.
The submissions supported many of the compliance cost reduction measures and remedial measures proposed in the discussion document. Base maintenance measures such as those relating to second-hand goods input tax credits, and the effects of de-registration when assets are retained, were, as expected, unpopular. However, such measures are essential to the revenue.
I realise that many of the submissions came from businesses and groups represented here today, so I take this opportunity to thank you for the time and effort that obviously went into them.
The next stage of the review involves reconsidering the GST treatment of imported services, since electronic commerce has vastly improved the ability of New Zealand businesses to export and import services. The review will consider whether New Zealand should introduce a reverse charge mechanism for imported services. Officials will be reporting to me on the issues later this year.
Turning briefly to another review, the post-implementation review of the compliance and penalties legislation, which came into effect in 1997, has just begun. As you may know, reviewing new legislation after it has had time to "bed in" is an important part of the generic tax policy process. To date, the review has concentrated on identifying problem areas and considering relevant recommendations of the Committee of Experts on Tax Compliance and the Finance and Expenditure Committee inquiry. Consultation with professional groups will begin soon.
Submissions on proposals contained in two discussion documents issued late last year, Less Taxing Tax and Interest Deductions for Companies, are being analysed. Submissions on the former were generally favourable, with the main concern being that they didn't go far enough. Submissions on the interest proposals supported the recasting of the core rule, but opposed the thin capitalisation "safe harbour" proposal. The Government broadly supports the proposals set out in the discussion documents, but there is still a fair bit of detailed policy work to do on both sets of proposals, so changes to the interest deductibility rules are not expected to make it into legislations in the first half of the year.
In the months leading up to the election Labour announced its intention to review the tax system when we were in office. The terms of reference and the process of the review are in the process of being developed. I see it as a high-level review that looks at the robustness of the current system and whether it meets the demands of today's fast-changing business environment. I do not see the terms of reference concentrating on specific issues, like whether we should have a capital gains tax or carbon charge, for example, even though these issues may come up in the course of the review. I do intend to consult with interested parties, such as the Institute of Chartered Accountants, on the terms of reference and the process of the review.
To conclude, it is going to be a busy year or two in the tax policy area. As I have stated, the Government endorses the generic tax policy process and believes it has a vital role to play in shaping tax policy. This means there will be continuing consultation, on both a formal and informal basis, between the Government and the stakeholders in the tax community. I value your views and look forward to working with you.