Hon Peter Dunne's Address to Manufacturers and Exporters Association Council Meeting
20 July 2010
Christchurch
5pm, Monday 19 July 2010
Good afternoon and thank you for inviting me to speak to you today.
As Minister of Revenue, I am pleased to be here addressing a group that plays a key role as our economy begins the climb out of recession.
My party, UnitedFuture, has always been pro-business, not for ideological reasons, but because of the simple reality that without manufacturers and exporters producing quality goods that will be attractive to world markets, we will not have the national income we need to meet the expectations citizens have of their governments.
I would like to talk to you about some of the tax measures in Budget 2010 that will help make New Zealand more favourable for manufacturers and exporters and more competitive internationally.
I will also share with you some of the work that is happening beyond the Budget work, which we believe will help better position our tax system, and by extension, our economy as we emerge from the recession.
The Budget tax changes of course were influenced by the recommendations of the Victoria University Tax Working Group.
The Working Group made it clear that maintaining the status quo was not an option and outlined a number of recommendations for a way forward.
In particular, the group reported that New Zealand relied heavily on taxes most harmful to growth, particularly corporate and personal income taxes, and that the tax system favoured over-investment in property.
It also found that the tax system lacked integrity and fairness because of differences in the tax treatment of entities which allowed people to shelter their income to avoid paying the tax they should or to gain access to social assistance they would otherwise not be entitled to.
The Government has responded to that and Budget 2010 made some of the most significant changes to the tax system in the last 20 years.
The changes introduced in this year’s Budget followed principles that will resonate with many of you: to boost savings, investment and productivity; to ensure our tax system is internationally competitive; and to keep our tax system as simple as possible, by removing distortions within it.
As we do so, it will be essential to protect and maintain the integrity of the tax system.
Many of the measures which I will talk about today, are underpinned by those principles.
While Budget 2010 benefited New Zealand taxpayers, it was not a lolly scramble. It was a prudent Budget, so it delivered benefits while remaining broadly revenue neutral.
By October this year the bottom tax rate will have fallen nearly 50% in the last five years to 10.5 cents – the biggest percentage fall of any rates and the threshold up to which it applies will have gone up considerably, from $9,500 to $14,000.
Ordinary New Zealanders will see an increase in their take-home pay which should encourage them to save for retirement thanks to a shift away from income tax and towards GST.
All intermediate tax rates will also have been reduced, and every income threshold increased, so much so that for nearly three quarters of taxpayers, their top marginal rate will now be just 17.5%.
And when the effect of Working for Families tax credits is added in, a family with two children will now pay effectively no tax at all, until their earnings exceed $50,000.
An important change was the alignment of the top personal tax rate with the trust tax rate at 33%.
Aligning the company tax rate and the rate for savings vehicles, such as PIEs, sends a powerful signal about the desirability of promoting greater savings and investment levels.
This will also significantly improve the integrity and fairness of the tax system by removing the main tax advantage that could be gained by sheltering income in trusts.
From April next year, the company tax rate and that applying to certain savings vehicles will drop to just 28 cents.
The company tax rate reduction is good news for business as it will make New Zealand a more competitive investment destination.
Balancing that, the Tax Working Group believed that property is significantly under-taxed and the depreciation changes introduced in the Budget should address those concerns.
As I said; a Budget boosting investment and productivity while maintaining the integrity of the system.
It is worth noting that the removal of the tax distortions affecting the investment property market, where an overall $200 billion dollar investment shows annual losses of up to $500 million costing about $150 million a year, has been achieved without resorting to draconian measures like a land tax, a capital gains tax, or a risk free rate of return method, measures I was very pleased to see the Prime Minister rule out at an early stage.
These changes are legislated and will start applying from October this year and April next year.
However, work on the Budget 2010 tax package is by no means finished.
While depreciation deductions for buildings that have an estimated useful life of 50 years or more have been removed as part of Budget 2010, building owners will still be able to claim tax deductions for repairs and maintenance to maintain the condition and value of their properties.
The Government announced that it is undertaking a review of the law on building fit-out for non-residential buildings to address some uncertainty in this area. The intention is to confirm current practice with respect to items of building fit-out that are treated as separate items of depreciable property. Officials plan to consult on these issues in August.
The number of LAQCs has exploded since their introduction in 1992, rising by almost 240% during the term of the previous government to more than 130,000 entities.
Between 2000 and 2008 the value of their tax losses rose to almost $2.3 billion, a jump of just under 400%.
The Government’s intention therefore is to address a number of problems with the current qualifying company rules which undermine the integrity of the tax system.
These problems include arbitrage opportunities resulting from qualifying company profits being taxed at the company rate while the losses of LAQCs are allowed as a deduction from a shareholder's annual gross income, which may be taxed at a higher rate.
An issues paper seeking public comment on moving qualifying companies to a flow-through treatment for income tax purposes was released on 20 May and officials are currently in the process of analysing the submissions that have come in.
The current qualifying company rules for closely-held companies would be replaced with a new set of rules to treat loss attributing qualifying companies as flow-through entities for income tax purposes, similar to limited partnerships.
As a result, a company's income and losses would both be passed on to shareholders, so income would be taxed and losses deducted at a shareholder's marginal tax rate.
As part of Budget 2010, the Government announced that it would reform the definition of income used for determining entitlements to certain social assistance programmes, namely, Working for Families tax credits, student allowances and community services cards.
Currently, people can enter into arrangements that have the effect of inflating their social assistance entitlements beyond what their true economic circumstances justify resulting in families receiving different levels of assistance depending on how they structure their affairs.
This undermines public confidence in the social assistance system.
So the intention of the reforms would be to improve the integrity of these social assistance programmes.
Legislation has already been enacted to prevent investment losses, such as rental losses, being used to increase people's Working for Families tax credits.
Other possible extensions to the definition of income for social assistance purposes include income from trusts, certain fringe benefits, and the income from PIEs that are not locked-in.
Public comment will be sought in August 2010 and legislation implementing these reforms should be enacted by the end of this year.
All these measures are aimed at promoting growth and building a tax system that is fair – removing inequalities and protecting the integrity of the system.
When the GST rate rises to 15% in October, those on main benefits and fixed incomes, including New Zealand Superannuation and Government Superannuation, will be fully compensated immediately for that increase, with further cost of living adjustments due in April 2011.
And on the subject of GST, I would like to turn now to an issue of some interest to this group; the GST treatment of tools used to produce goods in New Zealand for export.
In this situation, I understand that the non-resident generally requires the New Zealand company to quote and invoice for two distinct fees: one for the tools needed to make the final product; and one for the final product itself.
The end product to be exported is zero-rated and there is no problem there.
However, the tooling costs are subject to GST.
The tools will not be exported and will remain in New Zealand to produce the goods to be exported.
As the tools are (as we understand it) used solely for the purposes of creating the end product rather than being the end product, they are considered to be consumed in New Zealand and therefore subject to GST, even if the purchaser of the tools is the non-resident customer.
I appreciate your concerns.
You have a strong advocate in John Walley who has staunchly championed this issue on your behalf.
I have spoken to you today about the integrity of the tax system and this is another such instance.
The official viewpoint, as John has no doubt communicated to you, is that creating exceptions to the consumption rule would not deal with the situation of tools being used for both domestic consumption and export.
I ask you to consider postage stamps.
Postage stamps are all subject to GST, even though it is acknowledged that some are purchased for international postage.
Because it is administratively very difficult to separate stamps to be used for domestic consumption and those to be exported, GST is charged uniformly at the standard rate.
Having said that, I must tell you that government has considerable sympathy with the position Association members find themselves in and I have asked Inland Revenue officials to look at this issue in more detail.
No doubt you have heard some of the debate about removing GST from healthy foods.
One of the strongest features of New Zealand’s GST system, and a reason for its wide acceptance, has been its simplicity.
Removing basic foods from the GST base would compromise that simplicity by creating boundary uncertainties.
Certainly some countries such as Australia have exemptions, but this makes compliance far more complex.
Removing GST from these food items would substantially reduce the efficiency of the tax, increase compliance and administration costs, and reduce the revenue collected from GST.
As you imagine, I receive many calls from various groups in society seeking the exemption or zero-rating of this item or that from GST.
All can make reasonably compelling cases why their particular interest is different and should be considered favourably.
They all say their particular concern would not affect revenue “that much” and that the likely gains would outweigh any losses.
I am extremely reluctant to compromise the integrity and simplicity of our GST system by acceding to these requests.
Of course, all our efforts to reform the tax system will amount to very little if they are not matched by similar efforts to modernise the way the system works.
That is why I have been placing a considerable emphasis on bringing the administration of our tax system into the 21st century, with a much greater reliance on electronic interactions, very much like the way we do our banking at present.
Here is a figure to ponder – every working day Inland Revenue currently sends out about 100,000 individual items of correspondence to taxpayers, that is around 26 million items a year, not bad for a population of just over 4 million people!
Consultation closes this Friday on a set of proposals for removing complexity and allowing easier management of tax affairs.
The key proposal is to help people more easily manage their own tax affairs and entitlements online through their own secure area on Inland Revenue’s website – like internet banking.
Comprehensive online information will be provided too.
These proposals could do away with the millions of paper letters, forms and booklets which are printed, filled out, and posted now.
This move to online transactions will also apply to businesses – the proposal is that business’ accounting software will be able to take care of routine tax obligations without the need to fill in separate forms.
The first area we would like to use this is PAYE.
The plan is for your existing payroll software to be enhanced to enable it to communicate directly with Inland Revenue over the internet.
This would bring two big advantages to you as employers:
• Eliminating the need for you to get information from your employees about the other deductions that go through the tax system – student loan repayments, child support deductions, Kiwisaver and so on. Your payroll software could download and update all of this information automatically without you having to know about it.
• Eliminating the need for you to separately file an Employer Monthly Schedule. Your payroll software could upload this information to Inland Revenue automatically.
These changes should save considerable time up-front, and save time down the track by eliminating the need to go back and correct errors.
If this kind of direct communication between Inland Revenue and your accounting system works well in PAYE, we would like to roll it out to other areas of routine tax compliance too – maybe GST and Fringe Benefit Tax.
The consultation document also proposed some ideas around the annual square-up process.
At the moment, people who think they might get a refund can check online, and then request a personal tax summary to confirm they have a refund – which is paid into their bank account – or a tax bill they have to pay.
Under the proposal, the risk of errors in PAYE deducted each pay-day would be greatly reduced, so for many people there would be no end-of-year square-up and refund, but no tax bill either.
We have to change and move away from our paper-intensive system, and the Transform IR project which you will be hearing more about over the next couple of years will do just that.
We will be starting with the administration of the student loan scheme.
There is still time to make a submission and you can do so at the Government’s consultation website – just google “making tax easier”.
Your views are also sought on another set of proposals for smoothing an administrative process.
Inevitably a number of cases each year end up in dispute.
It is in the Government’s interests and in the interests of taxpayers to see these disputes resolved quickly and efficiently.
You may be aware that the current process for disputes was designed following the Richardson Committee’s review and recommendations.
However a number of issues still continue to be irksome and were raised by the NZ Institute of Chartered Accountants and the Law Society in a submission to me as the Minister of Revenue.
Amongst other issues, the current process can be costly and time consuming and this can be prohibitive for some taxpayers who choose to abandon a dispute when they become aware of the costs involved.
An issues paper has been released which sets out proposals for dealing with these issues.
As I said, it benefits neither government nor the taxpayer to have a disputes process that is overly complex.
I urge you to go to the Inland Revenue’s policy website, read the proposals and make a submission.
Other work in the pipeline will also smooth the route for business internationally.
Inland Revenue’s double tax agreement negotiation programme has been very active and agreements already negotiated are proving very beneficial for cross-border trade.
The current emphasis is on negotiating updates to our DTAs with key trading and investment partners with a view to securing similar withholding tax rates on cross-border dividend and royalty payments, to those secured in 2008 with the United States and in 2009 with Australia.
Negotiations are now under way with the United Kingdom and Canada, with more to follow.
In addition, a new DTA with Turkey was signed in April this year, and negotiations for a DTA with Hong Kong will begin in October.
Additional negotiations for new DTAs are also in the pipeline.
Every day now, the news about the economy is more optimistic.
We are receiving reports of a tentative turnaround in the economic outlook and beginning to glimpse light at the end of the tunnel.
The Budget package and the tax measures I have been talking about are aimed at nurturing that recovery by supporting business.
Where once we had a tax system which was complex and onerous, we are I believe, moving in the right direction.
Thank you