Speech To International Fiscal AssociationTreasurer
Thank you for the opportunity to speak to your conference today.
The International Fiscal Association seems a unique institution. It combines the skills of different disciplines - accountancy, economics and law - as well as the contributions of both the private and public sectors. It provides an opportunity for rational discussion of tax issues critical to our future. I encourage you to make the most of this opportunity, and I'm very interested in your comments and feedback.
One thing that particularly impresses me about the tax area is the amount of consultation that goes on here under the generic tax policy process. It would not be possible without your support, and I appreciate the unpaid time and effort you put into it. I think it is a good way to develop sound policy, and I look forward to your continued involvement in the process.
Before I talk in more detail about the current issues in tax, I would like to touch briefly on some of the broader issues around taxes and the Government's economic policies.
My last job was Minister of Health, which was a job I really enjoyed. Health issues are very real, and very immediate. They matter to people.
Finance may seem less immediate, but it matters just as much to people. Decisions the Government makes about tax policy, about economic policy, about fiscal policy, have a direct impact on how life is for every New Zealander and every New Zealand family.
One of the fundamentals underpinning this Government is a strong commitment to lower taxes.
People who work hard and who want to do better for themselves and their families must see the rewards of their efforts.
The Government has delivered on tax reductions for low and middle income families. The middle tax rate has been cut from 28 to 21 cents in the dollar, and the income level at which the top tax rate sets in increased from $30,875 to $38,000. As well as these tax cuts, the Government has delivered large increases in family assistance for low to middle income families.
A family on $45,000 with three school-aged children is now taking home $94 more each week than it would have been three years ago - $45 of that has been tax cuts and $49 has been extra family assistance. A family on $35,000 with four younger children is nearly $120 a week better off now through tax cuts and extra family assistance.
This is middle New Zealand and this is practical help for these families.
IRD research shows that as many as 25,000 working families have been missing out on their Family Assistance entitlement. These families are the target of the Department's recent advertising campaign.
The Government is committed to further tax reductions when conditions allow it. This year's Budget will outline those conditions.
The day I became Minister of Revenue tax hit the headlines in a way more typical of the media coverage of some health issues.
What began as allegations about the way Inland Revenue had attempted to collect tax in a specific case soon led to criticisms of the new compliance and penalties legislation. There is no doubt that a nerve had been touched. As I discovered over that first week, everybody had a story to tell about the tax man.
Inland Revenue has got a job to do, and that is to collect tax as laid out in legislation. People don't like paying tax, though we have to keep these stories in perspective and remember that 95 percent of people pay the tax they owe. There does, however, have to be a balance between the need to collect tax and the need to maintain the goodwill and confidence of taxpayers.
There do seem to be some issues raised which could usefully be looked at in more detail. There are a number of options for this, ranging from an advisory committee reporting to me, to the Finance and Expenditure Select Committee running an investigation. Whatever option is decided, and that is still to be determined, we have to ensure that an inquiry ends up being useful to the taxpayers, rather than just to politicians.
Just on the issues of the last couple of weeks, I would like to clear up three of the more outrageous claims made.
84 debt could not possibly grow into $85,000. Under the old penalty laws (pre April 1997) it would have been less than $300 after six years. Under the new regime debts under $100 won't attract any penalties at all.
And Revenue does not search homes in its debt collection practices. No IRD staff, or people acting on IRD's behalf, forced their way into someone's home to assess assets.
Bankruptcy is a last resort. Less than half a percent of Inland Revenue's debt cases lead to eventual bankruptcy or liquidation.
Most of the examples cited in the controversy that followed were covered by the old system of penalties, especially the old late payment penalty. The new legislation came into effect in April 1997, and won't really begin to affect business taxpayers until their 1997-98 returns are audited.
The main aims of the change to the new compliance and penalty rules was to encourage voluntary compliance, in two ways: firstly, by clearly setting out in law what taxpayers' obligations are, and secondly, by linking non-compliance with penalties that have been standardised across all types of tax. Standardising penalties removed the inconsistencies and gaps in coverage that were a feature of the old system. Penalties used to vary by tax type, and some taxes had no penalties at all.
The new legislation is more consistent and there was wide consultation on it over four years as policy was being developed and through the select committee stage.
There was general agreement that the old system of penalties had deficiencies, and at least the framework that was replacing it made sense.
The legislation is scheduled for review at the end of the year, as the final stage of the application of the generic tax policy process to this reform. The idea behind these post-implementation reviews is to give new legislation time to "bed in" and then review it to see how well it's working. When the compliance and penalties legislation is reviewed I anticipate further useful contributions from the groups represented here today.
The Committee of Experts on Tax Compliance has recommended that there be no major changes to the new penalties until that review has taken place.
The Committee raised the idea of delaying for a few days the application of the late payment penalty, but not interest, and reducing the monthly penalty from 2% to 1%. I would be interested in hearing your views on how significant our penalty regime needs to be in order to ensure compliance.
Turning to another issue that has come to the fore in the last couple of weeks, I would like to touch upon tax simplification and its impact on tax administration.
A simpler tax system, together with the lower compliance costs associated with it, is not simple to do.
Simplicity has to be balanced with fairness, the fiscal impact and economic efficiency.
The Government has set its sights high on simplification. In relation to PAYE taxpayers, Government looked at what taxpayer information Inland Revenue really needs to do its job of collecting taxes, to fund schools and hospitals. Modern technology makes it possible to shift the emphasis from getting the necessary information from the income tax returns of individual employees, to getting it from employers and banks.
This is the reason that after this current tax year 1.2 million employees will be freed of the burden of filing an annual income tax return.
By simply eliminating over a million returns we remove not only the associated costs to taxpayers, but also the need for Inland Revenue to process all those bits of paper.
That change has made other changes within Inland Revenue both possible and necessary. It will mean the department will be able to focus on auditing and dealing with inquiries from business taxpayers.
The idea is to move away from large numbers of services with little added value, to small numbers of high-value services.
These changes will be put in place over the next 18 months.
The sheer scope of the changes will inevitably place strains on staff and management.
But the result will be a more focused tax administration offering better service to those who need it, especially small businesses.
This shift will be accompanied by raising the technical skill levels of staff, which is one of the three key recommendations of the Committee of Experts on Tax Compliance. It is something that makes good sense to me - and it has been part of Inland Revenue's business plan for some time.
As a final word on the matter, I know from my experiences in other areas that when major change is taking place, things may go wrong - and some probably will. When it happens we need to appreciate that this is the cost of change, and change is necessary to get improvements. As Minister of Revenue I would appreciate your co-operation over the next 18 months in signalling problem areas that look like emerging. This will enable problems to be dealt with in a sensible way.
Let's now have a look at the major issues that are coming up over the next few months.
We hope to usher the current tax bill through the House as scheduled, with passage in late April or early May. We have received a good number of quality submissions, and appreciate the effort many of you have put into improving the proposed legislation.
The second stage of tax simplification will focus on business taxpayers with the intention of eliminating unnecessary obligations, and simplifying those that remain.
To do this, Government is looking at the 'big picture' issues rather than thinking in terms of lots of small, piecemeal changes. For example, some clear problems have been identified:
Provisional tax doesn't provide for accurate payment and is onerous for many taxpayers.
Many people think use-of-money interest rates on underpayments are too high.
And we force small businesses to calculate their income exactly, when 'close enough' might be good enough.
One of the key messages coming through from the taxpayer research is that the time people spend on tax compliance is not as important as the concern they have about whether they will meet their obligation or, by some accident, fail to do so. Reducing this concern is a focus of further simplification work.
The rewrite of the Income Tax Act has thrown up a number of complex issues in relation to timing of deductions, the tax treatment of certain company and trust distributions, and the question of interest deductibility. Officials are in the process of reporting to the Government on these issues, and we will be seeking the public's views on them in accordance with the generic tax policy process.
The Government this week welcomed the release of the report of the Committee of Experts on Tax Compliance.
The report agrees that the Government is heading in the right direction by pursuing a robust, low rate, broad-based tax system. It recognises that the tax administration has improved over recent years but has identified areas such as technical skill levels that need further improvement.
The Government will seek public submissions through the generic tax policy process on a range of policy recommendations, including such issues as the Withholding Payments Regulations, the late payment penalty, and the information-gathering powers of the Commissioner.
The recommendations on the rewrite of the Income Tax Act will be referred to the rewrite's Advisory Panel, a group of private sector advisors, for consideration.
Several recommendations on simplifying the tax system will be referred to the tax simplification project.
Some issues - such as the taxation of charities and amateur sports bodies - are complex, and cannot be included in this year's tax policy work programme because it is already fully committed.
The Committee has produced a very thoughtful and valuable report. I trust that you, along with us, will give it the consideration it deserves. On behalf of the Government I want to thank the Committee chair, Sir Ian McKay, and its members - Tony Molloy, John Prebble and John Waugh - for the time and effort they have put into producing the report.
The final issue I want to mention today is the Government's GST review. Next week a discussion document will be released setting out proposals arising from the review.
The Government wants to make GST more workable, reduce compliance costs, and ensure the law on GST does what it was intended to do.
One proposal is to raise the GST registration threshold from $30,000 to $40,000. This would allow about 25,000 small businesses to stop accounting for GST if they wish to do so. Increases to other thresholds are also proposed.
The discussion document also looks at areas of erosion of the GST base, particularly in relation to second-hand goods and de-registration. Another of these loss areas is zero-rating of services consumed in New Zealand but contracted for overseas - for example, the payment of fees by non-resident parents for education of their children in New Zealand.
We want to act particularly quickly to close this last source of revenue loss, and will include the necessary legislation in the next tax bill, which we hope will be in May. This type of base maintenance legislation is often introduced into Parliament with effect from the date of introduction. Because this issue is an important one of defining New Zealand's boundary for GST purposes, the Government will set aside a limited time for consultation on the change beforehand.
So that is a run through of the current issues in tax.
One of the questions I have been asked most frequently since becoming Minister of Finance, is my view on New Zealand's economic outlook. Have we got a recovery or haven't we?
I think there's no doubt that we are going to have an economic recovery, we are seeing the start of it now. Confidence has lifted strongly in all sectors except agriculture. We need to see this turned into investment and jobs.
In terms of the impact on the average business, the expectation of a recovery is the first step in the right direction - the reality of the recovery is better. For most people 'economic growth' is about knowing you will still be in a job at Christmas time; that there'll be a bit left over to buy the kids new sports shoes; and that you've got the chance to get off welfare and into a new job.
This is obviously good news for the country. One of the chief reasons we weathered the Asian Crisis so well is because of the flexibility that has been built into relationships between businesses, between employers and employees, between people and the services they use.
Government decisions have also contributed - tax reductions and a $750 million reduction last year in Government expenditure plans.
But an economic recovery is not an invitation to gloss over some of the underlying issues this country faces. The imbalance of savings, declining rural and provincial incomes, the perception of a growing disparity between rich and poor - the recovery is going to help, but it is not going to turn these problems around. We must address these issues if we want New Zealanders to fulfil their aspirations for themselves and their country.
I might just add that while the perception is of a growing gap between rich and poor, in reality the gap opened up during the late 80s and has remained fairly steady since 1991.
It is important that New Zealanders of all income levels have the opportunity for better rewards for their work. Labour's policy of higher tax rates sends a negative message to every New Zealander who wants to do well.
I want to be part of a forward-looking Government which has the courage to grapple with difficult issues, whether social, economic or tax-related, and to work with New Zealanders and their communities to find solutions.
I hope to get to know many of you over the coming months, in which my initial role will probably be more as a listener. I look forward to working with you to achieve a better tax system.
I want to assure you that I am keen to keep an open mind on taxation issues, within the context of clear principles and good public policy maintained by my predecessors since the mid 80s.
Thank you for the opportunity to speak here today and I wish you the best for your conference.