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Bill Birch Speech On Taxation/IRD

Thank you for the opportunity to talk to you tonight. I have immensely enjoyed my relationship with ICANZ during my various periods as Minister of Finance, Treasurer, and Minister of Revenue.

The relationship between IRD, the Government, ICANZ and the profession is now built thoroughly into the structure of our system of tax administration in New Zealand.

You make an increasing contribution to the quality of the nation’s tax legislation, and the quality of tax administration. I have no doubt your role will continue to expand further, in the future.

In my 15 years as a Minister, I have held 17 different portfolios, answered 5259 Parliamentary questions, asked 1531 Parliamentary questions, introduced 80 Bills, and read, ticked or rejected 14,050 Treasury reports.

People keep asking what I intend after retirement. That’s an interesting question, but think instead for a moment about what I’m not going to do. I am not, for example, going to read another 14,000 Treasury reports!
The achievement of the 1990s in New Zealand, yes, let me say it, under a National-led Government, has been spectacular.

Net Crown debt was 52% of GDP in the early 1990s. Now it’s down to 22%, and I expect if we win another term that you’ll see it down around 17% in 3 years. That’s a huge monkey off the back of the taxpaying public.

After fiscal deficits from 1978 to 1993, this Government has delivered six consecutive surpluses. That’s an exceptional fiscal performance for any government anywhere, in world terms.

The result of those gains was a huge payoff, during the 1990s, for social services including health and education. After years of low growth, unprecedented gains are now being made.

In the last 6¾ years—that’s 27 consecutive quarters—we have had 23 quarters of positive growth, and only 4 negative quarters.

It has taken the worst international shock since 1979, in combination with two of the worst drought years in our history, to drive the restructured New Zealand economy into very slight negative growth figures.

The resilience of that economy is dramatically illustrated for all of us by the fact that a return to strong positive growth is universally expected among economic analysts during the next three years, in the period now ahead of us.

For the decade to 2002, economic growth in New Zealand looks like averaging around 3% a year, well over twice what we averaged in the previous decade. Why is growth important? Let’s all be quite clear about that.

If we can maintain that average for the next 10 years, then by 2009, real GDP per capita in this country will rise about by about $6000 during the decade to $29,500. That’s a gain of 25% in GDP per head, for all of us to share.

If you want good health and education systems in the country, then that’s the right way to get them—a way that works for everyone—instead of taxing the business initiative out of the community, and the progress out of the economy.

I hear it said in some quarters that the present Government has no vision for the new millennium. What a load of absolute garbage. Here’s our vision, and it’s not pie in the sky. It’s in line with what we have proved we can deliver:

 We aim to grow the economy by 10% in the next three years
 Create 100,000 new jobs
 Go on slashing debt, cut taxes significantly further
 Boost education and health funding
 Put a new focus on enterprise in a knowledge-based economy
 And use the international competitive edge created under National to make every New Zealander better educated and better off, in the period ahead, than we ever were before in the history of this country:

For the moment, however, let’s come back to the bread-and-butter issues of your own industry—tax policy, tax administration, and the continuous improvement of all the systems at all the levels involved in the tax system.

Today is, in a modest sense, a red-letter day for the tax industry.

On March 3 this year, the Finance and Expenditure Select Committee of Parliament resolved to conduct an inquiry into the powers and operations of the Inland Revenue Department.

After considering and deliberating on 188 submissions from the public, the Committee has tabled its Final Report in the House today.
The Committee has to be congratulated on a positive, helpful and constructive report.

I am particularly pleased to see that it has rejected the extremism and the more bizarre suggestions made by ACT finance spokesman Rodney Hide, who has been conducting, in my view, a quite outrageous politically motivated campaign aimed at destroying the credibility of the Inland Revenue Department.

In the event, though it has cost the taxpayer a fortune to take Mr Hide seriously enough to hold this inquiry, we have, as a result of the good sense of the majority of the committee, obtained some quite useful results from it.

Every one of the 27 recommendations made by the Committee will get serious consideration from the Government. IRD is already in the process of taking action on quite a large number of them.

We have, for example, already announced a reduction from 2% to 1% in the monthly penalty for late payment, and a doubling of the grace period for use of money interest rates from 15 days to one month.

We have also announced that the hardship, relief and instalment arrangements provisions which presently apply to a limited range of taxes will now be extended to all taxes.

In addition, we have announced that if a taxpayer enters an instalment arrangement, monthly penalties will be cancelled each month as the taxpayer complies. At present those penalties, even if the taxpayer defaults on a single monthly payment, can apply to the total arrangement,” he said.

I am pleased to see that, while referring to a PSA statement that senior management had engendered “a culture of punishment and fear”, the Committee’s report does not itself endorse that description.

It would have been very unfair to give credibility to a statement of that kind which was made in the middle of employment negotiations by the PSA as a trade union in the process of bargaining with the IRD as an employer.

Clearly, the culture, operations and policies of IRD are capable of improvement. The performance agreement between me and the Commissioner specifically recognises the importance of better transparency to the taxpayer.
There is a responsibility on the department to be transparent in its communications with taxpayers, to understand the problems taxpayers can get into, and to try to assist them to resolve those problems and meet their obligations.

When I first became Minister, there were significant problems around the administration of child support and student loans. Those problems have been addressed. I expect the same improvement in the interface with taxpayers.
But perhaps the most surprising outcome was that, considering that 8 million tax documents are generated a year in New Zealand, we got only 188 submissions from individuals and organisations complaining about IRD.

Frankly, I had expected that the Committee would be drowned in submissions. I had no idea how they might cope with the likely volume that could pour in from unhappy taxpayers right across the nation.

The fact that only 188 submissions were received is, in my view, the most comprehensive possible answer to the extremism of Rodney Hide’s campaign. That is a tribute to the good-sense of taxpayers as well as to the IRD.

I am particularly pleased that the Select Committee has taken the advice of the Committee of Experts and the Judiciary, and rejected the temptation to put the onus of proof on the department in tax matters.

The liability to pay tax is imposed on the taxpayer by statute. Unlike ordinary debts, the liability is a function of income. If the onus of proof moved to the department, the implications for compliance costs would be horrendous.

To safeguard the tax base, the department would have to require a major upgrading in record keeping by all taxpayers. I am not surprised that the Law Society was the only major supporter of reversing the burden of proof.

Lawyers would be the only people to benefit from that change, and they would make a fortune out of it.

The policy side, the report focuses to a large extent on the compliance and penalties rules. The Committee has concluded that the underlying structure of those rules is sound, but it calls for an improvement in flexibility.

The Government will begin a review of the compliance and penalties regime this month. Clearly, the Committee’s recommendations will be a key focus of that review. You can be assured that IRD will consult closely with ICANZ, as that review progresses.

The Committee’s comments on the operational side are also, in general, well balanced and fair. They rightly recognise that the collection of tax from often reluctant taxpayers is not always an easy matter.

Recommendations are made that that the Commissioner of Inland Revenue will need to consider closely. They aim, broadly speaking, at improving the Department’s communication with the taxpaying public.

Those recommendations rightly reflect that, at the end of the day, the vast majority of taxpayers genuinely want to understand and comply with their tax obligations. They need and deserve the support of the system in that wish.
Bearing in mind that taxpayers are the people who pay the wages of all public servants, that is clearly not too much to ask. It is fundamental to the credibility of the system in the eyes of the public.

Simultaneously, on the other side of the equation, where a minority of people set out deliberately to avoid or evade tax, then in the interest of honest taxpayers, IRD must be fair but tough enough to ensure the tax is collected.

None of us have an interest in encouraging a climate of opinion where tax avoidance or evasion are, whether formally or informally, sanctioned and encouraged by the administration or by the attitudes of the public.

We all know that willing voluntary compliance is the central asset of any tax system, and fundamental to the health of all tax administrations. Tax simplification is an essential buttress for the reputation of our tax system.
Compliance costs always bear most heavily on small businesses, and they are the very people worst equipped to cope with the costs involved.

The new discussion document, Less Taxing Tax, released recently, aims to set a direction for an ongoing programme of tax simplification, focuses on the needs of small businesses.

It picks up and proposes specific priority issues, identified in consultation as leading to reduced compliance costs. Those proposals make it absolutely clear that the Government is serious about tax simplification for small business.

The Committee of Experts, the Commerce Select Committee and the Finance & Expenditure Select Committee are all among the bodies consulted.
Among the operational issues raised by ICANZ is a need to make it clearer what taxpayers owe, so that accountants can advise them with more certainty and more cheaply.

ICANZ estimates, for example, that clearer calculation and notification of Use of Money Interest can reduce compliance costs by an estimated $100 million a year. Issues to be examined include, for example:

 Reducing penalties where the current ones are unnecessary to encourage compliance.
 Increasing certainty where arrangements are entered into for late payment of tax.
 Making provisional tax easier.
 And possibly, aligning payment dates.

Together, these elements make up a significant package, but we have preferred to call it a ‘modest’ one, because we see it as the beginning of a process that aims for something significantly bigger than this over time.

We have already removed the need for 1.2 million employees to file returns, and now we want something just as significant now for small business.

This is not the end of the tax simplification story for small business, but it is a very practical beginning. We have consulted widely with business and tax practitioners to identify the issues, and set out what we think they are.
1. There is a need to see if we can find easier ways of working out tax payments and reducing need to deal with IRD.

2. In tackling that, we need to recognise that small business taxpayers are not a single uniform group. They vary in their requirements.

3. And we also need to reduce, not just the time involved, but also the stress factor, in meeting tax obligations. The fact is, even for people genuinely keen to meet their tax obligations, the fear of making a mistake is, under the present system, ever present and very real.

As a result, we see it as highly desirable to:

 Make it easier to pay tax.
 Reduce the need to contact IRD.
 And reduce the stress factor.
 Discussions to date identify four players in the tax process.
 The small business taxpayer
 The IRD
 Tax agents such as accountants
 And intermediaries in the payment process, such as banks or payroll companies
There does quite clearly seem to be too high a burden on small businesses. Tax collection is too focussed on small businesses meeting IRD’s requirements, without regard for the requirements of those businesses.

We will be looking at whether tax agents and banks can expand their role to allow business people to focus more of their time on running their businesses. That could well mean a need to look at changing the law.

We will for example be asking banks and tax agents—If we change the law what can you do, to make it easier and less stressful for IRD to collect the taxes payable to the Government by NZ businesses.

There is one final issue I would like to touch on this evening.
A month or so back, I attended the Commonwealth Finance Ministers’ annual meeting, held this year in the Cayman Islands. A lot of information is exchanged by Finance Ministers at those meetings.

This year, I came back from that meeting more persuaded than ever of the need for vigilance against those who seek to raid the tax systems of others by means of shonky tax avoidance and evasion schemes.

Small countries around the world are very vulnerable to the wiles of innovative carpet-baggers offering the prospect of immediate no-risk returns to governments if they will assume risks which the proponents of those schemes are unwilling to take upon their own dishonest shoulders.

There are still too many such schemes rattling around the world. The Pacific is not immune.

Legislation introduced in recent years in New Zealand provides both deterrence and guidance for investors tempted to put money into schemes that look too good to be true.

There is an old saying: If it walks like a duck and talks like a duck, then it probably is a duck. That saying is eminently true of get-rich-quick schemes based on promises of tax evasion or tax avoidance.

Point One: Remind your clients that, under the penalties regime since 1996, schemes involving an abusive tax position attract a penalty of 100% and additional interest, on top of the tax which should have been paid.

An abusive tax position is one involving an unacceptable interpretation of tax laws with the dominant purpose of tax avoidance. Investments of that kind, under present New Zealand law, can therefore prove to be very costly indeed.

Point Two: Make sure your clients know that, where they are tempted, they should require the promoter of the scheme to show them a copy of a binding ruling from Inland Revenue.

Under the binding rulings regime introduced in 1996, any scheme can be submitted to Inland Revenue for a ruling that gives certainty about the tax treatment IRD will apply. The absence of such a ruling may be a sign that the transaction involves aggressive tax avoidance, and is a dangerous investment.

As Minister of Revenue, I want it to be very clear to the general investor that caution is the only sound policy when presented with the temptation of schemes of this nature, where the result in terms of tax benefit looks too good to be true.

The most likely outcome of an investment in such a scheme is an Inland Revenue audit followed by disallowance of the deductions claimed, or assessment for the tax avoided, plus the possibility of penalties and interest.

IRD is very vigilant nowadays in auditing to detect schemes of that kind, has the full backing of modern laws, and does not hesitate to take the appropriate action. Do not let your clients remain in ignorance of this.

Ladies and gentlemen, thank you for your attention. In conclusion, may I simply say how very much it has pleased me during recent years to have been able to reduce the middle effective tax rate by 25%, and lift the threshold.

I can assure you it gave me immense satisfaction to pass those benefits on to working families in New Zealand as a reward for their initiative.

I hope sincerely that my successor may, in the next six years, accomplish at least as much more by way of further tax reductions, to create a better growth economy.

Thank you for your cooperation through this whole period, and the best of luck for the future.

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