21 June, 2012
Keynote Address to NZ Payroll Practitioners’ Association Annual Conference
Thank you once again for inviting me back to speak to you.
It is always a pleasure to attend your conferences.
Each year as I prepare to attend your conference I think about the various tax initiatives being delivered and how they might affect you, and there are many.
Today, I would like to look forward, to things that will happen and to things that could happen.
I want to talk about upcoming changes to tax rules and about changes to the tax administration as we know it.
The business of collecting tax is not a matter of going out and plundering the citizens for their first-born and their hard-earned cash.
We are not talking about the Sheriff of Nottingham and I want to come back to this question of the role of the department a little later.
The objective is not to collect as much tax as possible, but to collect the fair and correct amount from each taxpayer, and to do it efficiently so as to minimise costs on the taxpayer.
Taxation and the tax system have to be both fair and efficient.
My job, as the Minister of Revenue therefore, is primarily to oversee the development of fair and efficient tax policies which will deliver the necessary revenue to fund government services and support the Government’s objectives for the economy.
A good tax system can and does support economic development.
I think we all know that the Government is committed to a return to surplus in 2014/15.
This is an important goal for New Zealand.
These are uncertain economic times we live in and while we have weathered the Global Financial Crisis, the threat of recession continues to hang over Europe and that will have implications for us if Australia and China, our two biggest trading partners, are adversely affected.
While it has been acceptable in the past to simply borrow money from overseas to fund Government spending, this is no longer palatable and every New Zealander is now far more conscious of the need for saving and prudent spending.
The debt crises various European states that have borrowed far more extensively than we would have ever considered appropriate, and the consequences they now are facing, serves to ram home the point.
Even though large scale is no longer a credible option, we need to continue to maintain a high standard of public services.
The Government’s response is a win-win for taxpayers.
By working through the tax system and steadily eliminating inconsistencies and inequities, we make the tax system fairer and along the way we also collect more of the revenue that should be gathered.
Budget 2012 was largely focused on improving fairness in the system.
Tax credits which were outdated and had no clear policy rationale for their continued existence were repealed and the tax credit for the active income for children was replaced with a more targeted approach.
Because the tax credit changes apply from the current tax year (2012/13), transitional rules have been developed to help businesses as they make the necessary adjustment to their systems.
Details of these can be found on Inland Revenue’s tax policy website.
Also repealed was the student loan voluntary repayment bonus.
Like the tax credits, the bonus scheme has been overtaken by events and the Government has since introduced a number of initiatives to increase student loan repayments – and, as last week’s figures showed, these are succeeding.
The bonus was repealed as it did not did not appear to be improving the value of the Student Loan Scheme, and the level of savings from the voluntary repayment bonus was lower than originally estimated.
The objective of the bonus scheme was to encourage faster repayments by borrowers who were slow to repay their student loan, by encouraging them to pay off their loan more quickly and, as a consequence, to reduce the costs to the Government of the Student Loan Scheme.
Yet the take-up of the policy has largely been by individuals who were already paying back their loans quickly, and not by those who were slower to repay their loans.
It therefore made sense to repeal it.
Budget 2012 also signalled the intention of the Government to put the headline change to livestock valuation rules in Budget legislation to prevent farmers who change valuation schemes receiving an unintended tax break.
The detailed legislation will follow later this year dealing with consequential matters.
There are other items also focused on improving fairness which are at different stages of the parliamentary process.
One of these is the review of the rules relating to the tax treatment of assets used for both earning income and for private use.
It is a principle of our tax system that when you incur costs in earning income, that income can be offset by those costs.
However, costs cannot offset income if they are private in nature.
The fact that an asset is used privately as well as to earn income does not mean that no deduction should be available – but it is not fair that the entire amount should be deductible, either.
Proposals have been through public consultation and I am expecting to introduce the resulting proposed new rules to the House in the next few months.
The usual process for new tax legislation is for all proposals to go through such a public consultation process before legislation is drafted and then introduced to the House.
Another set of proposed new rules due to be introduced to the House later this year will focus on salary or wages traded off for a non-cash benefit which is not taxable under the current tax rules.
An example would be a car park provided on the employer’s premises or a benefit provided to an employee of a charitable organisation.
An issues paper on this was released for public comment in April this year.
This suggested these benefits should be taxable when provided as part of a salary trade-off.
The paper also suggested “salary trade-off” being defined to pick up both explicit and implicit trade-offs.
It would include untaxed benefits when the salary alternative has not been specifically identified or valued, provided the employee had a legally enforceable right to the benefit as part of their contract.
I think that if the tax system is to be fair, then people on equivalent salary packages should be taxed equally, irrespective of how they are paid.
Similar reasoning applies when determining entitlements to social assistance, such as Working for Families.
I expect to introduce legislation in this area to the House late this year, after we have considered officials’ final recommendations in light of submissions on the issues paper.
There is a cost to collecting taxes, and that is a cost borne by the taxpayer.
So one way that the tax system can help the Government meet its goal is by minimising those costs through the efficient collection of taxes.
Some years ago, 1999, if memory serves me correctly, a big step forward was taken to help simplify tax affairs for most people and at the same time, maintain fairness.
This was the elimination of the requirement for the majority of salary and wage earners to file annual tax returns.
Cast your mind back – many of you here today will remember the old IR 5 tax return.
At a stroke, an onerous tax compliance burden was lifted off the majority of New Zealand’s salary and wage earners.
The system relies on the fact that in some years a person may pay slightly more tax than required while in other years they pay slightly less.
It is swings and roundabouts and in the end it all evens out.
To me, it seems like a very good trade-off for being let off having to do a tax return each year.
And the other advantage is that that the taxpayer no longer bears the cost of Inland Revenue processing millions of tax returns each year.
To my mind, a model of efficiency.
Yet this marvellous advantage is being steadily eroded by people who are selecting individual years in which they know they will get a refund while ignoring the other years in which there is tax to pay.
The net effect therefore is that small refunds are paid out but no corresponding tax to pay is paid.
A bill before the House at the moment contains a measure to try to restore a measure of fairness by proposing that people cherry-picking individual years to file a return should also file returns for the previous four consecutive years as well.
I think that should help to restore the balance.
In that same bill there are other proposals which will provide benefits for businesses.
In tax administration, an important way to simplify the system and gain greater efficiency is through greater use of electronic systems.
It is clearly the way to go as companies are increasingly managing their tax obligations through payroll and accounting software as you no doubt are fully aware.
The bill therefore proposes to modernise the record-keeping requirements of businesses by making it easier for taxpayers to store records offshore through applications from their data storage providers and by allowing taxpayers who submit returns electronically to store them electronically and not have to retain paper copies of returns.
This is a simple step, but a significant one which will reduce their record-keeping costs and reduce compliance costs.
All of this is interesting, but to some extent, it is business as usual.
I want to talk now about the future of Inland Revenue because any discussion of electronic filing and efficiency in tax administration must also include mention of Inland Revenue’s own systems.
Inland Revenue’s business transformation
As you know, Inland Revenue’s technology systems are ageing and the department’s ability to implement complex or major policy change is diminishing over time.
When FIRST was launched way back in 1991, all of Inland Revenue’s communication with taxpayers was on paper and when people spoke about electronic communication, they meant the radio.
Today FIRST needs to perform tasks undreamt of by its designers, and the reality is that it is a stretch at times.
Inland Revenue now stands at a cross roads.
Partly driven by its technological constraints, changing customer expectations and the economic environment, the department is taking a good hard look at itself.
I said before that IRD is not about going out and grabbing tax.
In my time serving as Revenue Minister for some years now, I have had the opportunity to witness the evolution of the department and come to appreciate more fully New Zealand’s expectations.
The department is no longer simply a tax administration.
As well as administering taxes, Inland Revenue is now also being called upon to handle KiwiSaver, child support and working for families.
In my view, the department will continue to have those responsibilities.
Inland Revenue now has a central role in customer service as it relates to the public service and this has put further strain on FIRST
Just as in the old days of the IR 5 tax return when Inland Revenue used to be the biggest publisher in New Zealand reaching every taxpayer in the land, today Inland Revenue interacts with more New Zealanders than any other government agency.
So what is the role of the department in the future?
What constitutes a good tax system?
If the department can accommodate social policy programmes such as KiwiSaver, what else could or should be within its ambit?
I do not know the answer to those questions – they will need to be answered by the department as it scrutinises every aspect of how it does business and those questions will also need to be answered by the public.
So I am inviting you, in the payroll industry to take this very rare opportunity to be part of that discussion.
It is your opportunity to influence the shape of the organisation – the very DNA of Inland Revenue and indeed of the whole of government for generations to come.
Over the next few years IRD will want to engage with practitioners as it looks for the best way to administer the tax system.
It will be most likely a time of dramatic change, as we both upgrade our technology to meet today’s challenges and continue to streamline the system to ensure both that outmoded provisions – like the tax credits I spoke of earlier – are eliminated and procedures that hark back to earlier more paper and process driven times are reformed.
I want your voice heard in that discussion.
Our economic environment and changing customer expectations mean that the tax system needs to continually adapt, but at the same time keep ensuring that the system remains fair and is efficient in gathering taxes.
Exactly how the department works in the future is now being redrawn and you, the people working in payroll, have an opportunity to help shape how the tax department works with you.
I urge you to grasp that opportunity.
I wish you a very enjoyable conference.