Annual report - 2004 - Part 2
Advising on key government policies from the 2004 Annual Report
Inland Revenue's Policy Advice Division and The Treasury advises government on tax policy and social policy measures that interact with the tax system. It also drafts tax legislation, sees bills through the lawmaking process, negotiates and maintains New Zealand's network of double tax agreements with other countries, and forecasts tax revenues.
Part of its role is managing the generic tax policy process, which ensures that proposed reforms are the subject of wide consultation at key points in the policy-making process, to produce tax policy that works.
The Policy Advice Division centres on the government's tax policy work programme which is updated periodically. Key themes include tax-related measures to support growth and innovation, simplification of the tax system (especially for small businesses), reducing compliance costs, protecting the revenue base and promoting social cohesion.
Critical work programme projects were completed within agreed timeframes throughout the year, despite the pressure on resources by the increasing consultation on policy proposals that is required, with the private sector, other government departments and at the select committee stage of new legislation.
The following are our main policy achievements for the year.
Growth and innovation
Recruitment to New Zealand A discussion document released in November set out proposals for reducing tax barriers to international recruitment to New Zealand. Policy development is complete and the reforms are ready for inclusion in a future bill.
Taxation of investment income An issues paper released in December canvassed options for improving the taxation of New Zealanders' non-controlled offshore investment in equity, the main problem being that current rules tax similar investments differently. In February, the government announced that its consideration of the problem would be extended to investments in domestic savings entities, to seek improved consistency in how the tax rules apply to all investments, both offshore and onshore.
Double tax agreements Significant progress occurred during the year in extending and maintaining New Zealand's network of 27 double tax agreements, which are designed to reduce tax impediments to cross-border trade and investment. Domestic legislative procedures for a new double tax agreement with South Africa were completed in June, two other new agreements moved a step further towards completion and three existing agreements were updated.
Tax simplification for small businesses A discussion document released in September set out a series of proposals for making tax easier for small businesses. One of the proposals was incorporated into the taxation bill introduced in March, and the others are the subject of further consultation and development.
Venture capital A main feature of the March taxation bill was legislation aligning New Zealand's venture capital rules more closely with those of Australia, removing a tax barrier to unlisted New Zealand companies gaining access to foreign venture capital.
Depreciation of assets An issues paper addressing the government's review of the tax depreciation rules was released in July 2004. This looks at ways of reducing possible tax biases in the rules and resolving technical problems. When submissions have been analysed, officials will make recommendations to the government.
Social cohesion
Working for Families The legislation giving effect to the Working for Families package announced in the May Budget was enacted in early June. The new legislation includes increases to the rates of family support, the introduction of a new "in-work" payment, and the phasing out of the child tax credit.
Child support Policy development focused on improvements to the way child support is administered, in a bill scheduled for introduction in the second half of 2004. The main proposal is to tackle the problem of child support debt by forgoing the collection of some penalties to provide an incentive for non-payers to re-enter the payment system.
Revenue base maintenance
Tax loopholes Revenue base maintenance measures are a standard feature of taxation bills. Two important base protection measures included in the taxation bill introduced in March deal with loopholes relating to the sale and leaseback of intangibles such as newspaper mastheads, and to the dividend tax rules that allow investments in certain unit trusts to be tax-free.
Banks Over the year, we reviewed the banking laws to determine whether they are sufficiently robust, in light of the fact that their tax payments do not appear to reflect the strong upward trend in their accounting profits. The review has involved extensive consultation with the banking industry and tax agents. The Minister of Finance announced in the Budget that any identified weaknesses in the rules may be addressed in the taxation bill to be introduced later in 2004.
Other initiatives
Tax disputes resolution A government discussion document released in July 2003 set out proposals for improving the legislative framework within which disputes between taxpayers and Inland Revenue are resolved. Proposed changes were included in the taxation bill introduced in March 2004.
Death and distributions Changes resulting from the government's review of the income tax rules on transfers of assets and liabilities to beneficiaries on the death of a taxpayer are to be included in the taxation bill planned for late 2004. Comprehensive rules that provide a uniform income tax treatment of these transfers will be introduced.
Fringe benefit tax review A discussion document released in December proposed changes intended to simplify fringe benefit tax, reduce the associated compliance costs and improve its effectiveness.
Disaster relief legislation Legislation drafted, introduced and enacted under urgency in March gave Inland Revenue greater flexibility in dealing with business taxpayers who were badly affected by the February floods in the lower North Island. The tax changes were part of a government package of relief measures for the agricultural sector and the wider community. Further tax changes were added to the taxation bill introduced in March.
Rewrite of the Income Tax Act The enactment in May of the three-volume Income Tax Act 2004 was a milestone for the Rewrite Project, which began a progressive rewrite of income tax legislation in the early 1990s. The aim of rewriting the Act is to make it easier for users to read and understand. The new Act, which comes into effect next year, rewrites the first five parts of the Income Tax Act 1994 and re-enacts the remainder of the parts, which are still to be rewritten.
Forecasting
Our Forecasting and Analysis Unit informs the government each month of tax collected against forecasts, and costs and provides information on a wide range of tax and social policy initiatives. It also prepared tax revenue and social expenditure forecasts for the December 2003 fiscal update and Budget 2004.
2004 signing
The 2,089-page Income Tax Act was signed into law by the Governor-General, Dame Silvia Cartwright on 7 May.
Front: Governor-General, Dame Silvia Cartwright. Back, left to right: Margaret Nixon, Warren Cole and Noel Galvin of the Policy Advice Division Drafting Unit.
Photo courtesy of the Dominion Post.
"The aim of rewriting the Income Tax Act is to produce legislation that is clear, uses plain language and is structurally consistent, says Richard Poland, Manager of the Rewrite Project. "This will make it easier for users to understand and locate information in the Act, ultimately saving them time and money.
"Aside from a small number of policy clarifications, the new Act has been written to ensure that it produces the same outcomes as the Income Tax Act 1994," he says.
The new Act comes into effect in the 2005-06 income year.
Date published: 16 Nov 2004
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