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Dunne: Society of Independent Financial Advisers

Speech notes
Revenue Minister, Peter Dunne
Society of Independent Financial Advisers
Embargoed to 4pm, Monday, May 26, 2008
James Cook Hotel
Wellington

Thank you for the invitation to address you this afternoon.

I am delighted to do so as the Minister of Revenue, who just also happens to be the leader of UnitedFuture.

The ink is now dry on last week’s Budget, and the post-Budget political and economic analysis has begun in earnest.

It has been the usual mix of the bizarre, the biased, and the extreme, punctuated by occasional outbreaks of wisdom and insight.

Over the past year or so, the changes to our tax system have been profound and, in my view, long overdue.

We have had the cut in the business tax rate; the changes to research and development funding and the tax implications; the new PIE investment vehicles with their lower tax rates; KiwiSaver with its phenomenal take-up rate; and of course, last week’s multi-billion dollar changes to the personal tax rates and the Working for Families package.

As Minister of Revenue, and as the leader of UnitedFuture, I am very proud to have been intimately involved in, and partly driving, those changes which I see as benefiting the economy and the household finances of the average Kiwi family.

They are all either a specific part of the confidence and supply agreement between UnitedFuture and the government after the last election, or flow directly from that.

However, with my UnitedFuture hat on, I want to see even more done.
The job is not over yet.

And I can promise you that, as long as the voters put UnitedFuture in the right place, my colleagues and I will be working assiduously to get the right balance between what the Government needs to do the work that only governments can do and what taxpayers get to retain for their own choices.

For us, it is a very simple equation: the market where possible, the government where necessary.
Where tax policy is concerned, UnitedFuture’s view is as follows.

We stand for an efficient and fair tax system, that is easy to comply with, and hard to avoid, where taxes are levied on a broad base, with comparatively low rates that are internationally competitive.

The Budget’s moves on personal taxes are a step in the right direction, but they are not the full answer.
These are Labour’s tax cuts, designed with a clear eye to Labour’s constituency.

We welcome the $10.6 billion package in three stages through to 2011, but believe the opportunity could have been taken to future proof the tax system by making it more robust.

UnitedFuture wants a more fundamental overhaul of the tax system than just tinkering.
There is still the unfinished business of the differing top personal tax rate, the business tax rate and the trust rate which last year’s Budget went part way towards addressing but which this year’s Budget makes no further progress upon.

Our tax policy, to be announced shortly, will address these issues.

We regard the Budget’s tax cuts as just the platform for the future changes we would like to make, rather than an end in themselves.
We do not see – as we deeply fear – these tax cuts being a down payment on rising household costs to come once the emissions trading scheme is introduced, when they should be the rightful dividend due to New Zealanders for the good economic times we have been through.

And we speak with the authority of being the only party to consistently cut tax rates when ever we have had the opportunity.

I was also Minister of Revenue at the time the National/United government cut personal tax rates, only to see the ongoing benefit of those reversed the following year when we were not part of the government and National needed to appease New Zealand First.
And then there was Labour’s 1999 increase in the top personal rate, which we have consistently opposed.

The lesson from all this, political consistency aside, is that it is not good enough for personal tax cuts to be on the agenda, only every decade or so.

That inevitably makes the process more difficult, and public expectations even harder to satisfy, but it is also unnecessary, and certainly not the way you would advise clients to run their household or small business.
We need to be embarking on a process of more regular, and therefore smaller and more affordable tax cuts that more accurately take account of both the pressures faced by households in meeting rising costs, and the challenges of maintaining international competitiveness.

Let me now turn to what the Government is doing to lower tax compliance costs for New Zealand business.

Legislation I will introduce to Parliament next month will remove tax impediments to the offshore expansion of New Zealand-resident businesses.
Complementary legislation will reduce the compliance costs for businesses – especially small and medium-sized enterprises, which represent a large portion of the economy and tend to bear a disproportionate tax compliance cost burden.

Raising a number of tax thresholds may mean fewer tax returns for businesses to complete; a reduction in the amount of information or number of calculations required to complete returns; and a reduction in the number of tax payments that must be made.

These are the first phase of the government’s review of measures to reduce tax compliance costs for businesses.
The main threshold changes include:

• The PAYE once-a-month filing and payment threshold will be raised from $100,000 to $250,000. That will allow more SME employers to file and pay PAYE deductions once a month instead of twice a month.

• The fringe benefit tax annual return filing threshold will be raised from $100,000 to $250,000. Annual filing will also be available for closely held companies if their FBT liability arises solely from the provision of up to two vehicles to shareholder-employees.

• These changes will increase the number of employers that can file and pay the tax annually rather than quarterly.

• The GST registration threshold will be raised from $40,000 to $50,000, which will mean fewer taxpayers will have to register for GST.

• The GST six-monthly return filing threshold will be raised from $250,000 to $500,000, which will allow more taxpayers to file returns on a six-monthly basis rather than a two-monthly basis.

The bill will introduce other threshold changes in relation to provisional tax, low-value trading stock and accounting for tax in respect of financial arrangements.
The second phase will consider initiatives that represent more significant departures from the normal tax rules that businesses have identified in consultation as being desirable.

Michael Cullen and I have been devoting a lot of attention to the continuing review of New Zealand’s international tax rules.

The aim of the review is to improve the competitiveness of New Zealand’s international tax rules by bringing them into line with the relevant rules of our main competitors.
These changes will enable New Zealand businesses to compete more effectively in foreign markets.

The central feature of the reform, announced in Budget 2007, is the introduction of a tax exemption for active income from the offshore operations of New Zealand-resident businesses.

Our current rules tax that income, with the exception of income from operations in the so-called ‘grey list’ of eight countries that our law singles out as having tax systems comparable to our own.
Extensive consultation with businesses has helped to shape other aspects of the reform as proposed in the forthcoming bill.

The active income exemption will be available to all controlled foreign companies in all jurisdictions, which means the grey list of eight is no longer required.

There will, however, be a ‘grey list of one’, which will consist of Australia.
That means New Zealand companies setting up operations in Australia, which is usually the first country of choice for our small and medium-sized businesses that want to expand overseas, will not have to face the compliance costs associated with meeting the active business test.

As financial advisers, you will have a strong interest in the promotion of a stable, long-term savings environment to reduce the uncertainty that has plagued the retirement savings area in particular, since superannuation first became a political football in the early 1970s.

Kiwisaver and the New Zealand Superannuation Fund have been the most significant government sponsored initiatives in this area in recent years.
Standing alongside them have been the rules to reform personal savings through the introduction of the PIE rules.

We welcome the fact that the Zealand Superannuation Fund now stands at around $29 billion.

While we respect its independence and its mandate to secure the best possible level of returns for the Fund, we would nevertheless like to see it become more active in the domestic infrastructure.
For its part, KiwiSaver has been an outstanding success, with well over 600,000 members already, and likely to be in excess of 700,000 by the end of its first year.

That represents just over 30% of the workforce, or more than 15% of the total population.

UnitedFuture has long held the view that a successful introduction and take-up of KiwiSaver makes the question of compulsion from some point an inevitability.
The phenomenal success of KiwiSaver in its first year in our view simply brings that day closer.

In the longer term, we see the questions of KiwiSaver compulsion and future tax reform as intertwined, raising the real possibility of future tax reductions being offset against Kiwisaver contributions, thus reducing some of the pressures the stimulatory effects of tax cuts might otherwise have on interest rates.

The changes to the savings environment and the issues that flow from the high number of collapses of finance companies over the last two years have brought issues regarding the promotion of financial literacy, and the nature and reliability available to investors into sharp focus.
In that context, it would be remiss of me to speak to financial advisers and not mention the Financial Advisers Bill, currently being considered by Parliament’s Finance and Expenditure select committee.

I am sure there would be widespread agreement on the concept behind the Bill, but as always, the devil lies in the detail.

In particular, there has been opposition expressed to the definition of financial adviser because its scope is considered too broad, and might unintentionally capture businesses that provide advice as an ancillary service only, or infrequently.
For example, it might capture a Citizens’ Advice Bureau or even the husband who advises his wife to go out and buy a Lotto ticket.

Clearly, such possibilities are absurd, and well beyond the scope of what were intended.

But on the other hand, financial advice, by its very nature, can be broad, and can have many consequences, so the definition needs to be written in such a way to include all of what might be reasonable held to be legitimate financial advice.
The select committee considering the Bill has obviously wrestled with this conundrum, and has prepared a revised definition of “financial adviser” upon which it is now inviting submissions.

The revised definition is narrower, and is intended to capture only those whose primary business is the provision of financial advice or who regularly provide such advice in the course of their business.

As Minister of Revenue, I am very pleased with the direction of tax reform we have been able to achieve over the last three years.
Changes to the tax regimes for business, investment, research and developments, savings, charitable donations and now personal taxes have all helped position our country well for the future.

Much more remains to be done, of course, both to take these changes forwards and to further reform our tax system.

These challenges are ones that both as Minister and as leader of UnitedFuture I am looking forward to progressing.

Thank you.


ENDS

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