Dunne: Deloitte tax conference
Minister of Revenue: speech to Deloitte tax conference, 14 June 2006
The Revenue Minister addresses a tax seminar in Auckland
I'm very pleased to have the opportunity to speak to your conference today.
You have asked me to update you on tax policy matters and to comment on the risks and challenges for tax policy in a multi-party environment.
The MMP environment
I will begin by commenting on the political and parliamentary environment that influences tax policy and legislation under MMP.
Under first-past-the-post it was possible to have majority governments so strong that tax policy proposals could be moved quickly and relatively unchanged through to legislation - even to be rushed through Parliament late at night.
All that has changed with MMP, under which coalition government is the norm.
MMP makes policy development and law-making more complicated and, as a result, they take more time.
At present we have a Labour-led minority government that has entered into confidence and supply agreements with two other parties, one of them United Future, in order to be able to govern.
That adds complexity to the policy development process. It also slows it down, because of the number of views, perspectives and priorities that must now be taken into account and managed.
And I as Minister of Revenue am neither a member of the major party of government nor part of the government itself.
It works, however.
As Minister, I am solely responsible for all revenue areas except tax policy.
Responsibility for tax policy rests jointly with me and the Minister of Finance, Dr Cullen.
We exercise our joint responsibility for tax policy through a regular weekly meeting in which we discuss policy issues and make decisions.
Select committee work under MMP
MMP has also affected the way that select committees work.
Parliament employs select committees of MPs to consider proposed legislation and to carry out a wide range of Parliamentary work.
A select committee is a small group of MPs who carry out a detailed examination or consideration of a matter and then report back to Parliament as a whole.
It is a matter of the smaller group reporting back to the larger group. That is more efficient than asking every MP to study every matter and every bill before Parliament in detail.
Parliament makes the decisions on whether to change proposed legislation, for example. Select committees can only report on bills and recommend changes to the proposed legislation.
It is in select committees that the public becomes directly involved in the work of Parliament. Through submissions, they express their views on matters before a select committee and they may appear in person before a committee to discuss their submission.
The public can - and do - influence select committees to recommend changes to proposed legislation. This direct contact of public and MPs on legislative matters is a distinctive feature of New Zealand's parliamentary system.
Another feature of select committee work under MMP is that bills cannot be rushed through select committees, since their composition generally reflects the proportionality of Parliament.
The Finance and Expenditure Committee, which scrutinises taxation bills on behalf of Parliament, is made up of four Labour MPs, four National MPs, and one each from United Future, Act, the Green Party, Maori Party and New Zealand First.
There is no majority, and no party has control of the committee, so proposed legislation must be carefully managed through the select committee process. It takes time, patience and a certain degree of compromise to arrive at majority agreements.
The generic tax policy process, which was established in 1994, constitutes an excellent framework for working under MMP. It, too, slows down policy-making by requiring consultation with affected taxpayers at key points in the process, well before proposed changes appear in a bill.
I think all agree that the delay is worth it, however. Early consultation - whether through discussion documents or informal discussion - results in better policy proposals and, ultimately, better legislation.
Potential problems with proposed changes tend to be exposed early in the policy process, and many have been worked through before the changes appear in a bill.
I think it is fair to say that, amongst tax practitioners, the generic tax policy process has become an accepted way of dealing with tax policy. Indeed, tax practitioners and professional associations seem to expect it to be used.
The generic tax policy process has also achieved a degree of international renown, with several countries having inquired into its operation.
Most recently, members of the Australian Board of Taxation visited New Zealand in April to study it at close range, meeting with officials, tax professionals and MPs.
The downside of the process for tax practitioners is that taking part involves time and resources.
It is not unusual for several forms of consultation on different reforms to be taking place simultaneously, which can stretch the resources of those who want to participate in all of them.
It works both ways, however. Increased numbers of people and organisations taking part in the consultative process requires more work, time and resources from policy officials and select committees.
For example, since the generic tax policy process came into being, the number of submissions on bills has increased in number, length and technicality.
As a result, officials' reports on submissions to the select committee are correspondingly large and technical, often ranging in size from 100 to 200 pages.
I am greatly appreciative of the effort you put into the process, and I know that at lot of work goes into submissions on various government discussion documents and issues papers, as well as consultation directly with officials.
The alternative, however, is not to seek your views on proposed policy, or to seek them to a lesser degree - and I do not think that would be acceptable to most tax professionals these days.
Business tax review
The post-election confidence and supply agreement signed between United Future and Labour resulted in the addition of three important items to the government's tax policy programme.
Chief of these was the major business tax review that is under way now. Its purpose is to ensure the tax system works to give better incentives for productivity gains and improved competitiveness with Australia.
We are making good progress and are well on track to issue in July a discussion document outlining a number of possible initiatives.
In negotiating our post-election confidence and supply agreement with the government, we placed particular emphasis on business tax reform because we saw it as a pressing need - especially since the Working for Families package has enhanced the financial situation of nearly 350,000 working families.
It is also true, however, that business tax rates cannot be considered in isolation from their impact on personal tax rates. And any significant cut in business tax rates will raise questions about personal tax rates.
The other two tax elements of United Future's agreement with the government include a review of the charitable donations rebate, which will be getting under way later this year, and the publication of a government discussion paper on income splitting, which is planned for next year.
The discussion paper assumes greater significance given the increasing use of income splitting as a tax avoidance mechanism to offset high marginal tax rates. That is a practice highlighted in Inland Revenue's briefing to me as incoming minister.
The charities tax review will be looking at the current personal rebate, and also issues such as the possibility of using the PAYE system to make charitable deductions and refundibility of imputation credits.
The work programme
The tax policy work programme that we released in March is an interim one that carried over projects from the previous work programme, or that had been previously announced, but does not extend much beyond the middle of the year.
The definitive work programme to June 2007 will be announced once the resource and policy implications of the business tax review are clearer.
In the meantime, work on a number of other policy projects continues at a vigorous pace.
The first tax bill of the year was introduced in mid-May, passed its first reading last week and was referred to the Finance and Expenditure Committee for consideration and hearing of submissions.
The main feature of the bill is a wide-ranging reform of the taxation of income from share investments, whether through managed funds or direct investment by individuals.
The proposed changes on investment income were the subject of extensive consultation for over two years before being included, in modified form, in the recent tax bill.
To reiterate what I have been saying a lot recently, the current rules operate very unevenly and are riddled with inconsistencies. They favour direct investment over investment through funds, and they favour higher income investors through funds over lower income investors.
They favour investment overseas over investment in New Zealand, and they favour overseas investments in some countries over investment in others.
The reform places the tax rules on different types of share investment on an equal footing, introducing greater fairness and reducing distortions in investment decisions.
Levelling the field means that some will lose their disadvantages and some will lose their tax-favoured treatment. On the whole, more people will be better off under the changes.
One half of the reform package is removing the disadvantages facing people who invest through managed funds, which many people do. More people, especially lower income and middle income people, are expected to invest through funds after the work-based KiwiSaver scheme is in place.
The most notorious of the disadvantages of investing through funds is, of course, the flat 33% tax rate on share gains, which overtaxes those on a lower income tax rate. Under the proposed changes, lower income investors through funds will be taxed at their correct rate. Most commentators appear to support that part of the equation.
It is the other half of the reform that is arousing controversy - the half relating to overseas investment, especially direct investment in offshore shares. There isn't time today to go into the detail of the proposed offshore changes but, briefly, they do three things:
-·They remove the tax advantages enjoyed by individuals who invest directly in shares in the eight "grey list" countries.
-·They reduce the tax disadvantages of investors into countries that are not on the grey list, the non-traditional investment destinations.
-·And they ensure that direct investment is not tax-favoured over investment through funds.
Much of the concern about these proposals appears to be coming from small investors in offshore shares, many of whom are unlikely to be adversely affected by the changes to the offshore rules.
People with significant investments into grey list countries, however, will be expected to pay a reasonable level of tax on their investment income.
Select committee scrutiny of the bill will be invaluable to fine-tuning the proposed changes and will undoubtedly throw light on any unintended effects.
To digress for a moment, I was interested to read last week of a novel interpretation of my having encouraged people to make submissions on the proposed changes relating to offshore share investments.
The article suggested that my remarks could be interpreted as - quote - "a thinly disguised attempt to sabotage the government's policy" in relation to the proposed method of taxing direct investments in offshore shares above a certain threshold.
I find the interpretation strange, given that it is part of the select committee's job to seek public comment on proposed legislation, to gauge whether people like it or dislike it and in what ways they think it can be improved.
Furthermore, I know of no occasion when a select committee has not recommended changes to a taxation bill. The whole select committee process of scrutiny is there to ensure better, more effective legislation - and if that means recommending changes the committee does it.
My point was simply that if people have views and alternative proposals, they should express them so we can look at them. I do not see what is in any way inappropriate about that!
What's coming up
To turn to other forthcoming events, a discussion document outlining proposed changes to the tax treatment of general and limited partnerships should be ready for release in a few weeks' time.
The main impetus for the tax changes is the forthcoming introduction of updated rules on limited partnerships, which are separate legal entities, to facilitate venture capital investment. That will require the parallel updating of the tax rules on general and limited partnerships.
Another discussion document to be released later in the year will deal with a range of concerns about tax shortfall penalties. In particular, it will look at the interaction between the penalty for taking an unacceptable tax position and the penalty for lack of reasonable care.
The discussion document will also look at ways of more closely aligning penalties with Inland Revenue's graduated "compliance model", which tailors departmental responses to taxpayer behaviour. It takes into account gradations of offending, which means being helpful to taxpayers who try to comply with the rules but don't always succeed, but using the full force of the law on those who have decided not to comply.
In July or August I expect to see a flurry of Orders in Council that will complete the legislative procedures in New Zealand relating to two new double tax agreements - with Spain and Poland - and amending two existing ones - with Australia and Singapore.
Double tax agreements are designed to reduce tax impediments to cross-border trade and investment. They ensure that businesses are not taxed twice on income earned in another country, and help enforce the tax laws between the countries involved. New Zealand has double tax agreements with 29 countries or jurisdictions.
The rewrite of the Income Tax Act is drawing to a close this year, and the final exposure drafts of rewritten legislation were released a couple of weeks ago for consultation. The next step will be the development of the rewrite bill for introduction into Parliament.
To conclude, it is obviously an extremely busy time on the tax policy front. The major event of the year is, of course, the business tax review, with the publication of a resulting discussion document planned for July. I look forward to hearing your views on the proposals.
I wish you a very successful conference. Thank you.