Speech to International Fiscal Association (IFA) Conference in QueenstownRevenue
Thank you for inviting me to speak here today.
I am very pleased to be with you today in my new role as Associate Revenue Minister.
As you are no doubt aware, the Revenue portfolio is a very busy one and one that I was very keen to be part of.
The workload will be shared between Revenue Minister David Parker and me.
As Associate, I will have primary responsibility for:
- Annual amendments to regulations
- The remedial work programme
- The Child Support Scheme (excluding matters relating to Child Support pass-on changes announced in Budget 2022)
- The Student Loan Scheme
- The KiwiSaver Scheme
- The Working for Families Scheme
And other initiative as agreed from time to time.
I am also pleased to be part of the portfolio because it is a crucial time for New Zealand’s economy.
I would like to start by acknowledging the devastation inflicted upon significant parts of the North Island by Cyclone Gabrielle, in particular parts of Northland, Hawke’s Bay and Tairāwhiti, as well as the Auckland Anniversary Floods. We’ve all seen the heart-breaking images of homes destroyed, families displaced and lives lost. But we’ve also seen communities’ band together, and first responders working around the clock to keep people safe and in many cases save lives.
In times of natural disaster it’s important that central Government does everything it can to support people in need, ensure vital infrastructure is operational, local businesses are supported, and communities and families have a roof over their heads, access to food, water and medical supplies.
The Government also recognises that the weather events are having an impact on people and businesses meeting their tax obligations. On Monday, the Prime Minister and Minister of Finance announced a range of tax relief measures for taxpayers affected by Cyclone Gabrielle and the Auckland Floods, and I thought it would be helpful to highlight them again for everyone in the room today.
- An extension of time for donated trading stock relief ensures that businesses can donate goods to help their communities without suffering a tax liability. This relief is available more broadly than for just the current weather events until 31 March 2024.
- Cabinet has also agreed to allow interest charged on late payments of tax to be written off up until 30 June 2023 for taxpayers affected by Cyclone Gabrielle.
- Also, businesses filing for the R&D Tax Incentive with a deadline falling between 26 January 2023 and 7 March 2023 will be allowed an extension of that deadline until 31 March 2023 if they are affected by Cyclone Gabrielle or the recent floods.
- Inland Revenue can also offer a range of other relief measures to assist taxpayers. These include setting up instalment arrangements, removal of late payment and late filing penalties, late deposits/early withdrawals into income equalisation accounts for farmers, and tax write-offs in cases of serious hardship.
All of this about ensuring that people affected by Cyclone Gabrielle and the Auckland floods can focus primarily on helping themselves and those around them. They can then deal with their tax affairs as soon as they reasonably can.
The Government is also considering other tax relief measures including those dealing with the tax consequences of damaged or destroyed assets. Such amendments were made in response to the Canterbury and Kaikōura earthquakes.
I will now make a few reflections on the economy before moving on to some of the challenges and changes in the tax area.
On the economic front, supply constraints have created difficulties, but they are easing, which is good. Supply constraints should continue to loosen as China reopens and production bottlenecks ease
Unemployment is low, people are working in record numbers, exports are growing, tourists are returning and overseas workers are arriving in greater numbers to fill existing vacancies.
Inflation is high everywhere, though it varies from country to country. This is partly due to those supply constraints, partly the very low interest rates that have prevailed until recently and the quantitative easing by central banks post the GFC and again during COVID.
And then, of course, the inflation from those causes has been made much worse by the energy crisis, caused by the invasion of Ukraine by Putin’s Russia. That big increase in the price of gas and oil has flowed through to the price of food and all commodities. As a result the world is experiencing the highest inflation we've had for decades.
Having said that, at 7.2 per cent New Zealand’s inflation rate in December compares favourably with the OECD average of 9.2 per cent and with those countries we normally compare ourselves to, such as Australia (7.8 per cent), the Eurozone (9.2 per cent) and the UK (10.5 percent).
New Zealand’s net government debt is modest compared with some.
Virtually all countries ran deficits during COVID, and are looking to consolidate as they try to get deficits under control. Very few countries in the world have a route back to surplus like we have.
We are in a strong position.
They are in good shape to meet the challenges ahead and support New Zealanders facing cost of living pressures and the impact of extreme weather events like the ones we have unfortunately seen earlier this month.
For the six months to the end of December the operating balance before gains and losses recorded a deficit of $2.8 billion, which was roughly in line with the forecast in the Half Year Economic and Fiscal Update in December 2022 and $5.2 billion lower than for the same period a year ago
Net debt in the December update was 21.6 per cent, slightly above forecast. This is one of the lowest levels in the OECD, and far below the Government's debt ceiling of 30% of GDP, ensuring we are well placed to handle the impacts of Cyclone Gabrielle and other future shocks should they occur.
On a comparative basis using IMF data, our debt as a percentage of GDP is about half of the level in Australia, a quarter of the level in the United Kingdom and a fifth of that in the US.
Turning to our domestic response, we are pushing on with our efforts to build a high wage, low carbon economy, while also helping relieve the costs of living pressures being felt by many middle and low income households.
The Government also helped businesses through the really difficult period during COVID, partly through the flexibilities that we introduced for meeting tax obligations to Inland Revenue, and allowing the IRD to write off interest on late payments of tax, and penalties.
Of course, Inland Revenue’s computer systems were one of the reasons that they were able to so quickly pay out the COVID support payments and small business cash flow loan scheme. A step change in connectivity both enabled much economic activity to continue during COVID and was also the reason that widespread effective financial supports were able to be provided to populations during the COVID restrictions.
Our response to COVID in a health sense has been one of, if not the best in the world. It has also led to one of the best economic outcomes in the world. I know, given the media debate in New Zealand, it's sometimes easy to forget that - but it's true.
And the state of the Government books, as I outlined above, proves the point.
We have come through COVID, with very low unemployment at 3.4 per cent. I know that produces some labour market pressures but it's fantastic that unemployment is so low.
So New Zealand can be very optimistic about the future.
We are however not immune to what happens overseas, which will put pressure on the New Zealand economy and Government’s books. The recent floods and the wider effects of Cyclone Gabrielle will also have an impact.
But we will continue to responsibly manage our finances and that means tough choices will be required as we tread a pathway back to surplus.
We've got very high rates of labour-force participation and a growing economy, which is bigger than pre COVID levels, and our exports are wanted by the world. So we're fortunate in that regard.
The Reserve Bank lifted the official cash rate to 4.25 per cent in November and foresaw a peak OCR of 5.5 per cent in 2023. Its economic view was for a shallow recession starting in mid-2023 and extending into 2024 amounting to a 1 per cent contraction. But it noted that the risk was skewed towards a shorter period of contraction.
However the OECD, in its assessment of New Zealand, forecast GDP to slow to 1.0% in 2023 and 1.2% in 2024. I acknowledge that assessment predates recent events and the figure could change.
It also noted that the reopening of the border has contributed to a surge in tourist arrivals, albeit to levels lower than before the pandemic.
Of course, cost of living pressures are tough for people, with inflation currently at 7.2 per cent for the year to September 2022, even though wage growth is close to that.
We've tried to help in a number of ways.
We reduced for an extended period fuel excise duty and road user charges. We've also halved public transport fares.
In addition, we had the Cost of Living Payment which had eligibility criteria that were essentially an income of up to $70,000 in the year ended 31 March 2022, plus being present and resident in New Zealand. IRD based its payments on its existing data sets, and there was no application process. Those data sets are actually very good, but they're not perfect, so some received a payment they were not eligible for.
The extra screening for the second and third payments meant that by the time the third payment went out, there were far fewer people paid who were not eligible.
It’s the first time we've done something like this as a country. It's an interesting experiment.
Modelling shows the number of payments made to potentially ineligible people was around 1 per cent to perhaps 1.7 per cent of total payments to date. We expect this percentage to drop as end of year filers become eligible to the payment. So, from our perspective, the cost of payments made to a small percentage who were ineligible, though higher than we wanted, was a lot lower than the cost of running the alternative – an applications-based process.
We expect around 2.1 million people will eventually receive a payment, once end of year tax returns are filed. Another one million people received the Winter Energy Payment to help with heating bills.
In respect of other measures that we've put in place during this term of government, we introduced a new top tax rate on income over $180,000 of 39 cents in the dollar.
I do worry about the growing gap between the super wealthy and the rest in New Zealand - and around the world. In fact, it's a global problem.
Some interesting work is being done looking at effective average tax rates paid by different sections of the population, which I understand will be published in the next few months. The High-Wealth Individuals Research Project looks at the amount of tax that they pay on their economic or comprehensive income. By economic income I mean income including non-taxed gains such as capital gains.
As you know, this is purely a research project and is not connected to Inland Revenue’s compliance function.
What will be interesting is to have a better understanding of how much tax is paid by the wealthy relative to their economic income compared with the middle class. The issue here is to better understand if our tax system is fair – that is, are those with more resources paying a similar or even lower rate of tax than those with fewer resources.
I understand this work also takes account of the impact GST as a proportion of income. I think it'll be interesting analysis for us to reflect upon.
While not all taxes need to be progressive the overall system should not be regressive. The very wealthy should at least pay the rate middle income earners already pay. It should also be fair between taxpayers of similar means.
I’m looking forward to seeing the conclusions of the High-Wealth Individuals Research Project so we get a better understanding of how progressive our tax system actually is.
In New Zealand, we were at the point where the tax advantages of people who have a large residential property investment portfolio were distorting the property market to the disadvantage of primarily young people buying their first home. The unique tax advantage of highly leveraged property was also distorting investment behaviour.
The majority of the Tax Working Group recommended a capital gains tax, and this was considered but did not proceed.
So we decided that we needed to take some heat out of the property market. We moved to disincentivise further investment in existing homes for rentals by limiting interest deductions for mortgage payments on investment properties. We exempted new builds, because we still need more houses built in New Zealand. There's good news on that front as well, which I’ll come to in a second.
Since then, interestingly, the Reserve Bank and some of the international commentators have noted that those moves were significant in the easing that we've seen in the property market.
On the housing build front, the number of houses being built in New Zealand has doubled since we took office. So a huge increase in supply.
Much of the increase in supply has been in apartment or semi-detached two or three storey buildings. Separate homes are not being built at as high a rate as was the case before this massive increase in house building.
The number of homes being built in Auckland, has also doubled. Predictions are that within two years, we will have caught up on the housing deficit. That is quite a turnaround, I would say.
One of the ways to achieve that is by reducing planning constraints to enable people to intensify within limits if they want – but not requiring anyone to intensify, but enabling it.
The tax measures we are taking
We're removing FBT on employer subsidised public transport. It is a distorting setting. At the moment FBT is not charged on car parks, but is charged on public transport subsidies. That's distortionary when you're trying to reduce carbon emissions.
You'll remember that a prior government had a crack at trying to fix that by imposing FBT on carparks. That ended a bit like the foray into an attempt to rationalise the GST treatment of services provided to managed funds last year.
I also have a view that everyone should pay their fair share.
This focus on fairness is one of the reasons we are removing the distortion around services provided through so-called “platforms”.
Often services provided through apps like Airbnb and Uber are not subject to GST, and this can disadvantage traditional businesses that are typically charging GST. Although this unfairness exists in theory between all registered and unregistered providers, digital platforms have allowed this competition to exist at a scale not previously available to unregistered sellers. So the current omnibus tax bill will enable GST on ride sharing, food and beverage delivery, and short-stay visitor accommodation.
It's done by platform operators collecting GST and returning it to Inland Revenue. Sellers that are below the GST registration threshold would not need to register for GST. Platform operators would be required to return a proportion of the GST charged to consumers to the sellers in recognition of the fact that unregistered seller bear GST on their costs. .
Current GST apportionment rules for business are pretty complex, as you will understand.
And we're trying to simplify that to reduce compliance costs. Generally speaking, it is important that the tax system minimises compliance costs on businesses and other taxpayers. If you make it easy for people to comply, you get higher levels of tax compliance. Tax management software also assists people to meet their obligations (and most people do want to meet their obligations) but it also makes it harder for those people who don't want to meet their obligations to get away with it.
Borders are opening up. The cross-border treatment of businesses operating on both sides of the border, including requirements for PAYE, FBT, and tax on superannuation contributions, are also being simplified.
We are also addressing a situation caused by a change to the law in Australia. The combination of that law and ours means that some have become tax resident in Australia. We are making amendments to tidy that up.
That's probably enough for me.
I wish you an enjoyable conference.