Deloitte 2018 Tax Conference
Deloitte 2018 Tax Conference
9.00am Friday 21 September 2018
Roxy Cinema, Miramar, Wellington
Thank you for inviting me to speak here today.
I would particularly like to acknowledge Sir Michael Cullen, who is pretty much responsible for me being able to achieve my political ambitions, and for this I will be forever grateful.
I would just like to briefly reflect on what happened yesterday for the government
- We graduated 98 new police – the largest single recruit wing in well over a decade
- Housing NZ did a full mea culpa on the highly flawed meth testing regime
- The Pike River re-entry agency released three options for retrieving the bodies of the ministers killed in 2010
- And the Tax Working group released its interim report
One of these delivered on a promise made nearly eight years ago.
Two are about building communities
Two are about addressing proven inequities
Three delivered on the coalition agreement
And none were designed for purely political purposes
While obviously there is a long way to go from an interim report to making cabinet decisions, the Tax Working group is fundamentally about delivering fairness to a system that many see as unfair or inequitable.
I will watch very closely to see if self-interest trumps fairness in the conversations Kiwis have about tax.
The Prime Minister outlined the government’s long-term priorities at the weekend, and we know we must take a number of steps to modernise the economy.
You will have heard government ministers reiterate on a number of occasions that we can’t rely on an economy built on population growth, an overheated housing market, and the export of raw commodities.
It is in no-one’s interests to have a widening gap between those at the top and those at the bottom, or for our regions to be neglected.
We see a role for government as a partner with business, especially in areas like research and innovation, trade, the future of work, and a low carbon, sustainable future.
We will focus on lifting productivity and wages, transitioning to a net zero emissions economy, helping our regions thrive, updating and building infrastructure, growing exports, supporting Māori and Pasifika aspirations, and reducing child poverty.
We will measure our success in terms of how we protect our environment, improve our skills and health, strengthen our communities and deliver shared prosperity.
The overall objective of our economic strategy is to build a productive, sustainable and inclusive economy. Our priorities for New Zealand are:
- Growing New Zealand’s prosperity, and just as importantly, ensuring all New Zealander’s benefit. That means reducing the gap between the highest and lowest income and wealth deciles increasing the value and diversity of our exports.
- Thriving and sustainable regions that benefit from an equitable share of sustainable economic growth.
- Delivering responsible governance with a broader measure of success. The Finance Minister is already working on the Government’s measures of success to ensure they better reflect New Zealanders’ lives.
- Meeting our Budget responsibility rules. These rules are a firm guide as to how we want to manage the economy.
- Transitioning to a clean, green carbon neutral New Zealand.
It’s been keeping us busy.
We kicked off by passing the Families package. It provides a boost to Working for Families and the introduction of a Best Start payment for newborns.
We also want to see more people able to afford their own homes and less property speculation. We’ve already extended the bright-line test from two years to five.
Later this year, I intend to introduce draft legislation containing proposals to ring-fence rental losses which will mean property speculators and investors will no longer be able to reduce their tax bill by offsetting tax losses from their residential rental properties against their other income.
There’s the long-standing issue of GST on low-value imported goods. It’s a question of fairness as offshore providers currently have no GST on the low value goods they supply to New Zealanders so have an advantage over domestic retailers. So we’re proposing that offshore suppliers of low value goods will be required to register for, collect and return GST.
We’re looking to introduce legislation before the end of the year. I do not anticipate it will make much difference to consumer’s purchasing patterns but it will bring a measure of fairness and equity back to the GST regime.
We also introduced and passed legislation to address the issue of cross-border base erosion and profit shifting. The measures we’ve enacted will go some way to stopping or minimising these cross-border strategies.
My officials will continue to monitor developments and follow up new areas for investigation. I suspect this area of tax law will keep many specialists in work for a long time to come.
Looking ahead, it’s shaping up as another very busy year for tax policy. The Government has no intention of taking its foot off the accelerator and of course, let’s not forget the Tax Working Group and their interim report.
TWG interim report
The Working Group released its interim report yesterday. I don’t know if many of you will have had a chance to examine the whole thing in a great amount of detail.
But we can get a sense of where the Working Group might be headed in their thoughts.
We have noted in particular that it has found New Zealand continues to have a relatively narrow tax base when compared to our OECD peers, and;
That our taxation system’s role in reducing income inequality is below the OECD average
It’s important to remember, however, that this is an interim report. So I’m reluctant to comment too much at this time. I don’t want to undermine the process by guessing what their final recommendations, due in February, might be.
There is also a fair amount of extra work, and public input that has to occur too.
This approach does expose a government to risks from those with vested interests who choose to spread misinformation or take dishonest positions. But we are doing things differently. There is a benefit from being transparent and open about our intentions.
This means the electorate will go to the ballot in 2020 fully aware of any potential tax changes.
The TWG was asked to consider the structure, fairness and balance of the tax system and we expect it to continue to address those questions.
Changes are potentially significant, with a broad reach. So I think it’s right that we seek a mandate from the country before we look to implement new measures. What we’re looking for is a full and rigorous discussion. And we are up for the challenge.
We accept that being in government requires hard decisions. They must be evidence-based, subject to wide consultation, and focussed on agreed outcomes.
These include the need to make the tax system fairer, more balanced, and to remove damaging distortions from the economy.
For now, I can say that the Interim report highlights a number of opportunities to indeed make the tax system fairer for all New Zealanders.
The release of the interim report gives you here another opportunity to submit to the working group and examine the impacts of these recommendations.
The Government will be listening to further feedback on the issues raised in the report.
I’m looking forward to seeing submissions from tax specialists such as yourselves on the workability of these recommendations.
It is very important to allow the review to run its course and the pros and cons of different changes to be fully debated
The Government’s always been clear that no changes will be implemented this term and that there are some key bottom lines, in particular the need to protect the family home and the land underneath it.
Other areas out of scope are any increase to income tax or GST; inheritance tax; land tax; petroleum and minerals royalties; wealth tax or a financial transactions tax.
We look forward to continuing to hear from the TWG as it considers feedback and prepares its final report for Government which is due in February.
The Minister of Finance and I have also released a letter to the TWG asking for more information.
We want it to consider and recommend an overall package of measures that could result in a revenue-neutral package.
We want it to consider a package which reduces inequality, so that New Zealand better reflects the OECD average, increases fairness across the tax system – and has special regard for housing affordability.
We want it to examine whether realisation or the risk-free rate of return (or a mix of both) is the most efficient method for extending a potential capital income tax on specific assets – with the goal of ensuring New Zealand’s tax system is fair and balanced.
We also have more specific questions, around:
- Capital, wealth and savings,
- Taxation of business, and the future of work
- multinationals and an equalisation tax
- environmental outcomes
- corrective taxes
- charities, and
- administration of the tax system
In the meantime I would encourage you all to remain engaged in the process so the Working Group has the best information to form its final recommendations.
As a final observation on the TWG process, the hard work and the heavy lifting, in a policy sense, is only one part of the equation.
Equally important to all of those who care about the structure of the tax system is the need to take people with you when you advocate change.
We are all working to effectively communicate a compelling vision around fairness, integrity, and an economy that is growing and working for all of us.
People like you also have an important role to play in these conversations, especially when informed voices are needed.
Which brings me to a point which is important to me.
Generic Tax Policy Process
In my time on the select committee and now as Minister, I’ve noticed that too often, there are times when the IRD is saying one thing while tax professionals are saying another.
None of us on the select committee were tax professionals, yet we were expected to rule on complex tax law.
I know that good relations already exist between the IRD and the private sector. I also know that Inland Revenue is currently undertaking work to try to improve how it engages with the sector. This is good.
Of course there will always be areas where full agreement cannot be reached, but it shouldn’t be a fundamental disagreement on crucial tax legislation.
As Minister I need to understand where the IRD and the private sector have reached agreement and where there is disagreement. This allows me to understand the trade-offs that can be contemplated, viewed against the big picture.
I understand that through initial discussions with stakeholders such as yourselves, officials are focused on identifying opportunities for earlier, wider and more frequent engagement.
In addition, genuine consultation is a two-way flow of information, and this should include another flow of information back to submitters so submitters know that officials have considered their points, whether any changes have been made to proposals as a result of their submission, and the reasons for that.
It’s more important than ever to for us to be working closely together. Our aspirations for the tax system reflect our aspirations for our society.
To make this happen we need better engagement between tax professionals, the wider public and the IRD on policy proposals.
The pay-offs for our economy and society will be immense.
Research & Development tax incentives
Another initiative that the Government believes will yield a massive pay-off is investment in R&D.
Later this year, we’ll introduce legislation that proposes a tax credit incentive for companies that undertake research and development.
We all know we have a productivity problem in New Zealand. We trail most of our OECD partners in GDP generated per hour worked. This is a handbrake on our ability to boost GDP per capita, a key measure of well-being.
There is a proven correlation between productivity and investment into R&D, especially if it’s generated by the private sector. So unsurprisingly, we’re way down the OECD list on this too.
We know that one of the things we must do is help create an environment that incentivises private R&D.
Inland Revenue and MBIE officials have been working with Callaghan Innovation and the private sector to understand how this might work in practise.
The proposal that officials have been working with is that we want to provide an incentive to a broad range of genuine R&D, so long as it’s carried out in New Zealand.
Feedback from submissions has meant we are considering a more inclusive definition of research and development so that innovative firms don’t feel their particular brand of R&D is being excluded.
I know, as always, Deloitte has played an important role in helping officials understand the realities of this proposal and how it can actually work.
The more detailed analysis Deloitte has provided as part of the submission process, and further meetings, has given officials useful insights for designing a workable and sustainable scheme for supporting research and development.
GST on low value goods
We can also look forward to legislation that will enable authorities to collect GST on low value imported goods. Currently, Customs does not collect GST on imported goods below $400 in value.
I’m very mindful of the challenges this presents, and officials are working through the options for achieving this in a way that’s fair to consumers, importers and suppliers.
Remember, the policy intent behind GST, as a broad-based tax, is that it applies to all goods and services consumed in New Zealand, with no or few exceptions.
It’s only been the administration and compliance costs associated with recovering GST from low value imported goods that has prevented Customs from collecting it, until now.
We’re set on an approach that requires off shore suppliers to collect GST and remit it to Inland Revenue.
Naturally, local retailers, who already levy GST on goods sold, have been very supportive and appreciate a measure that, in their view, levels the playing field with foreign sellers.
However, some major off-shore suppliers and marketplaces have pointed out the complexity and associated compliance costs with the scheme.
We’re heartened by Australia’s recent experience of deploying similar measures which took effect from 1 July this year.
The office of the Australian Treasurer, Hon Scott Morrison – who has recently been elevated to their Prime Minister, has noted that all major offshore suppliers and marketplaces have registered under Australia’s new rules
The design of New Zealand’s proposed rules will be broadly similar to those introduced in Australia, except for where differences from Australia’s rules may make the rules simpler for offshore businesses.
But simply put, if we don’t take action, the revenue the Government misses out on will increase each year alongside the expected growth in online shopping. So the sooner we do something the better.
Mostly though, it’s a matter of fairness. This measure further levels the playing field and therefore improves the integrity of our tax system.
This has been one of the busiest and most interesting weeks to be the Revenue Minister and a tax practitioner
The timing of your conference is impeccable