NEW ZEALAND INLAND REVENUE – Briefing for the incoming Minister of Revenue – 2005

BRIEFING FOR THE INCOMING

MINISTER OF REVENUE – 2005

Contents

Commissioner’s overview

Introduction

Key points

Role of the Minister of Revenue

Matters for immediate attention

Briefing

Tax policy

Administration of tax and social support programmes

Tables

Table 1 – Tax collections and tax rates: OECD countries

Table 2– Major features of the operational design work programme to June 2007

Table 3– Growth in revenue assessed

Table 4 – Growth in customer base

Table 5 – Peak and non-peak days planned for last quarter 2004–05

Table 6 – Comparison of electronic services available from 2002 to 2005

Table 7 – Accounts accessed through our Look at Account Information service for the month

Figures

Figure 1 – Total tax as a percentage of GDP – 2002

Figure 2 – New Zealand tax to GDP ratio

Figure 3 – Company tax rate 2005

Figure 4 – Company tax as a percentage of GDP 2002

Figure 5 –Top marginal personal tax rate 2004

Figure 6 – Disposable income (one earner family, non-beneficiaries)

Figure 7 – Effective marginal tax rates (non-beneficiaries, single earner family)

Figure 8 – Historical trends in statutory corporate tax rates

Figure 9 – Aggregate taxable income of individuals by $1,000 bands of taxable income

Figure 10 – Growth in numbers of taxpayers 1998–99 to 2003–04

Figure 11 – Income from trusts (IR 6)

Figure 12 – Growth in small and medium sized enterprises

Figure 13 – Compliance model

Figure 14 – Collectable debt 2003–04 and 2004–05

Figure 15 – Child support debt


Commissioner’s overview

Introduction

The effective and efficient operation of the tax system and administration is fundamental to the functioning of the economy and maintaining the social wellbeing of New Zealanders. The main roles that Inland Revenue undertakes include:

  • collecting tax, child support and student loan payments
  • making payments such as tax refunds and rebates, family assistance (including the Working for Families package), child support and paid parental leave
  • advising the government, together with the Treasury, on tax policy and social policy measures that interact with the tax system.

Inland Revenue’s outcomes, set out below,describeour contribution to the government’s outcomes, and to the welfare of all New Zealanders.

Primary outcome

  • Improve the economic and social wellbeing of New Zealanders.

Intermediate outcomes

  • Revenue is available to fund government programmes through people meeting payment obligations of their own accord.
  • People receive payments they are entitled to, enabling them to participate in society.

Inland Revenue has been given responsibility for a number of government initiatives that have expanded the functions of the department. Inland Revenue is no longer just a tax collection agency; it is also a major player in the provision of the government’s social support programmes.

Key points

The New Zealand tax system is fundamentally sound. This was the conclusion of the Tax Review 2001, chaired by Rob McLeod, which reviewed the policy and administration of the tax system. The good health of the tax system is shown by strong revenue flows and high levels of public confidence in the department. There are still challenges to be addressed, and these should be an early focus for the incominggovernment.

This briefing paper focuses on what we see as the most critical policy and operational challenges. Inland Revenue also has many important functions and other challenges in areas such as child support and student loans, which are not discussed in detail in this briefing paper. We will be reporting to you separately on these matters.

Policy challenges

  • New Zealand’s substantial company tax base is at risk because of our relatively high reliance on corporate tax as a revenue source and the relatively high foreign ownership of companies. Many other countries have lowered their company tax rates over recent years and, as they do so, it becomes harder for New Zealand to retain its corporate tax base.
  • Of particular concern are Australia’s lower, 30% company tax rate and its full imputation system, both of which can act as incentives to stream profits abroad, thus eroding our company tax base. We also need to establish a response to Australia’s reduction of non-resident withholding rates on interest, dividends and royalties. This means that the future of the trans-Tasman tax relationship needs to be considered as a matter of priority.
  • Problems with our personal income tax structure are also emerging, particularly in relation to the 33% and 39% personal income tax rates. There is growing evidence of tax sheltering and income splitting, raising questions of how robust our tax system is.

Operational challenges

  • The department is currently implementing a full programme of initiatives, which will need to be reprioritised to accommodate any new initiatives.
  • We are also considering how we can adjust our operating model to address current operating pressures, particularly if demand for our services and/or the number of people who are required to contact us continues to grow
  • Any legislative changes that require significant changes to our information technology systemswill requiresufficient lead time to make and testthe changes. The introduction of more complexity into our information technology systems, caused through integrating new products and services, means that these lead times are steadily increasing.
  • We have reassessed our approach to providing electronic services. Internationally, tax administrations have led the introduction of electronic services, which highlights the importance of introducing new electronic services and expanding the use of the electronic channel. We have refocused our approach to take more of a leadership role in supporting the government’s 2010 e-government goals.

Role of the Minister of Revenue

The role of the Minister of Revenue is established by protocols between Ministers in the finance area;it is not a statutory role. On the basis of past experience, we would expect that you would need to focus on:

  • management of tax policy issues—through the management of the tax policy work programme.
  • overview of the administration of the department—through normal public service accountability mechanisms, such as ourStatement of Intent, output plan, quarterly reports and annual report.

The legislation rests responsibility for determining taxpayer-specific affairs with the Commissioner of Inland Revenue. Responsibility for protecting the integrity of the tax system falls to both officials and any Minister having responsibility under the Tax Administration Act 1994. Section 6(1) of this Act states:

Every Minister and every officer of any government agency having responsibilities under this Act… are at all times to use their best endeavours to protect the integrity of the tax system.

The Act defines the integrity of the tax system under section 6(2) as:

Without limiting its meaning, “the integrity of the tax system” includes---

(a)Taxpayer perceptions of that integrity; and

(b)The rights of taxpayers to have their liability determined fairly, impartially, and according to law; and

(c)The rights of taxpayers to have their individual affairs kept confidential and treated with no greater or lesser favour than the tax affairs of other taxpayers; and

(d)The responsibilities of taxpayers to comply with the law; and

(e)The responsibilities of those administering the law to maintain the confidentiality of the affairs of taxpayers; and

(f)The responsibilities of those administering the law to do so fairly, impartially, and according to law.

We can assist you in undertaking these functions by providing you with policy advice, providing revenue forecasting information, and briefings on administrative issues as they arise.

We also provide you with specific assistance in a number of areas.

Reports and briefings

We will provide you with a number of regular briefings and reports—the timing and scope of these will be set to meet your requirements.

  • Briefings: I suggest that we discuss the type and frequency of our briefings with you in the near future.
  • Tax policy work programme updates: we will report to you periodically on the management of the tax policy work programme.
  • Quarterly reports: we will provide you quarterly reports on our progress against the performance expectations set out in our Output Plan.
  • Monthly status reports: we will provide you with a monthly report on management and other issues affecting the department.

Departmental staff for your office

The Policy Advice Division can provide you with suitable people to act as an interface between the department and Ministers. Over the last three years we have provided two full-time staff members in the office of the Minister of Revenue, and a part-time staff member in the office of the Associate Minister of Revenue. As well as assisting with the large volume of tax-specific queries Ministers’ offices receive, these people play a valuable coordination and advisory role for Ministers. At an early opportunity we need to discuss the Government’s requirements for the staffing of offices.

Responding to ministerial and parliamentary questions

As Minister of Revenue you can expect to receive taxpayer-specific queries and complaints. The department’sMinisterial Services unit coordinates the prompt drafting of responses for you (and other Ministers associated with the Revenue portfolio) to correspondence and parliamentary questions. In the past, Ministers have generally passed on taxpayer specific correspondence to the Commissioner’s Office to respond to directly.

Enquiries from other Members of the Parliament and constituents

There will also be occasions when you and other Members of Parliament may wish to contact us on behalf of a constituent, or advise them on the best way of contacting Inland Revenue. To assist with this process we will besending all Members of Parliament our guide—Contacting Inland Revenue.

Tax affairs of Members of Parliament—our Special Files unit

Inland Revenue recognises that High Court judges, Members of Parliament, and its own staff face the additional responsibility of upholding the taxation law that we administer. To assist these people, we offer a centralised account management service for the taxation affairs of Members of Parliament. The Special Files Unit is located in Wellington and brings together the full range of our services for this customer group in one site. Using this service is optional for Members of Parliament and High Court judges. We will be writing to all Members of Parliament shortly to make sure they are aware of this service.

Matters for immediate attention

There are a number of tax policy and operational issues that you will need to consider in the very near future.

Tax policy

  • Inland Revenue provides staff members (usually from our Policy Advice Division) to the offices of the Minister of Revenue and Associate Minister of Revenue. We will discuss the servicing of your office with you as soon as possible.
  • One of the first steps for the new government is the development of a three-year revenue strategy. We and the Treasury will be reporting to you on this issue shortly.
  • Another important issue is the development of a rolling 18-month tax policy work programme. Again, we will be reporting to you on this matter in the very near future.
  • There are a number of key policy proposals that will need to be either reviewed or advanced. They include the KiwiSaver initiative, the carbon tax, and those outlined in the recent discussion document Taxation of investment income. We will discuss these matters with you in the context of our report on a draft 18-month tax policy work programme.
  • The student loan repayment threshold for the 2006–07 income year needs to be made by Order in Council before the end of the calendar year, and the income threshold for the full-interest write-off is set as part of this process.
  • The incoming government will need to consider moving the reinstatement of two tax-related bills that were before Parliament when it rose for the general election: the Taxation (Depreciation, Payment Dates Alignment, FBT and Miscellaneous Provisions) Bill, introduced in May, and the Child Support Amendment Bill, introduced in July. The tax bill introduced in May includes confirmation of tax rates for 2005–06. Constitutionally, this measure must be enacted by 31 March 2006. We will report to you separately on the reinstatement issue.
  • We have a commitment to advise the Australian government before the end of the year on New Zealand’s willingness to consider reductions in withholding tax rates. Depending on the outcome of that consideration, a comprehensive re-negotiation of the double tax agreement between Australia and New Zealand may become necessary. We will be reporting to you on this issue.

Operational

  • As outlined in this briefing paper, the operational work programme is fully committed to announced initiatives. We need to discuss with you whether these initiatives still reflect government’s priorities.
  • We will shortly begin planning for the 2006–07 Budget cycle. It would be desirable to discuss aspects of the department’s current funding position with you at an early opportunity.

I look forward to discussing the issues raised in this briefing with you and the new Government in the near future.

David Butler

Commissioner of Inland Revenue

Dated:16 September 2005

Briefing

Tax policy

New Zealand’s tax system, which relies for most of its revenue on a broadlybased income tax and consumption tax, is fundamentally sound and well regarded internationally.

Nevertheless, a number of pressures are emerging. There is mounting evidence that our personal tax structure is fragile and that income splitting and tax sheltering are on the increase. There is also reason to believe that our company tax base is at some risk, company taxation being an important source of revenue. Of particular concern are Australia’s lower company tax rate and full imputation system, which provide incentives for profits to be streamed abroad and can erode New Zealand’s corporate tax base. How New Zealand should best respond to these emerging pressures is a difficult problem to which there are no simple solutions.

The tax policy section of this briefing explains New Zealand’s tax policy process, compares New Zealand’s taxes with those in other countries, discusses key challenges in tax policy and outlines what we believe should be key themes in future work. In examining key challenges, our focus is on income tax issues. This is not because our other main tax, GST, is unimportant – rather, it is because we believe there are fewer problems with New Zealand’s GST. It is our income tax base where most pressures are emerging, although GST fraud and avoidance schemes also pose a significant fiscal risk. These issuesare raised in the administration section of this briefing paper.

Throughout this briefing paper we work within the tax policy settings that existed at the time the general election was called.

The tax policy process

Policy Advice Division

Inland Revenue’s Policy Advice Division, together with the Treasury, advises the government on all aspects of tax policy and on social policy measures that interact with the tax system. Its other roles include:

  • forecasting tax revenues
  • drafting tax legislation
  • negotiating and maintaining New Zealand’s network of double tax agreements with other countries
  • providing ministerial services.

The Policy Advice Division has a relatively small staff. It includes about 50 policy analysts, forecasters and legislative drafters who are directly responsible for the management and delivery of the tax policy work programme.

As part of its role, the Policy Advice Division manages the Generic Tax Policy Process, which covers a range of activities from initial identification of policy issues through to drafting the ensuing legislation and post-implementation review of the legislation. Our tax policy website plays a vital part in the process.

Another important role of the Policy Advice Division is to service the Minister’s office. Over the previous government’s term Inland Revenue provided two full-time staff members to the Minister of Revenue’s Office and a part-time staff member to the Associate Minister of Revenue’s Office. We will discuss the servicing of your office with you shortly.

Policy project management

The stages of our project management are:

  • Identifying issues in tax and tax-related social policy through our links and communication with Ministers; the private sector; other parts of Inland Revenue, especially operational areas and adjudication and rulings; other government departments, such as the Treasury, Ministry of Economic Development, and Ministry of Social Development; and other tax authorities and international bodies such as the OECD.
  • Developing those issues into policy proposals, taking into account how they will be managed through to implementation and review. This involves early identification of potential problems and options and how these might be handled.
  • Managing the consultation process on major reforms. Consultation may range from the preparation of government discussion documents setting out proposed policy to less formal discussions with business sectors likely to be affected by policy proposals.
  • Managing proposed changes through the ministerial and Cabinet stages and the ensuing legislative stage, from drafting of taxation bills through to supporting their passage through Parliament.
  • Post-implementation review of major reforms when potential problems are identified, to ensure that new legislation is working as intended.

No policy project is a success until it has been successfully implemented. And successful implementation of new measures depends not only on making the necessary information available to taxpayers and Inland Revenue staff alike, but also on integrating the changes into operational systems – for example, by way of form redesign and necessary changes to the computer system. That can take a great deal of time and resources for implementing major reforms such as Working for Families. See page 40 for a discussion of current operational restraints on introducing new measures.