Annual Report 2006: Part two - Delivering on our outcomes
Advising on Government policy
Inland Revenue's Policy Advice Division, working together with The Treasury, advises the government on all aspects of tax policy and on social policy measures that interact with the tax system. It also drafts tax legislation, supports bills through the parliamentary process, negotiates and maintains New Zealand's network of double tax agreements with other countries, and forecasts tax revenue.
It manages the government's Generic Tax Policy Process, which ensures that proposed tax reforms are the subject of consultation with affected taxpayers at key points in the policymaking process. Early consultation on potential changes makes for workable policy and helps interested parties to understand the rationale behind the changes and how they are intended to work.
The work of the division is based on the government's tax policy work programme, which is updated regularly. Key items on the work programme announced in March 2006 are the Business Tax Review, tax measures to increase productivity and growth, and fundamental changes to savings policy and New Zealand's international tax rules.
Meeting the Government's election commitments
The September 2005 general election had a major influence on the year's policy development. Family assistance and student loan commitments announced in the lead-up to the election required policy development and drafting of legislation in preparation for a bill subsequently introduced in November 2005. The bill boosted income assistance for working families, removed interest on student loans for most borrowers, and provided for an amnesty on student loan penalties for certain borrowers who live overseas. The legislation was enacted in December 2005.
Business Tax Review
One of the major projects resulting from post-election confidence and supply agreements was the Business Tax Review. Its stated purpose is to ensure that the tax system provides better incentives for productivity gains and improved competitiveness with Australia. Officials began work on the review in December 2005, in preparation for release in July 2006 of a discussion document outlining possible business tax reforms.
Other business initiatives
Legislation enacted in March 2006 brought in the major package of business tax changes announced in Budget 2005, which were intended to promote economic growth. They included changes to the tax depreciation rates and fringe benefit tax rules, alignment of GST and provisional tax payment dates, introduction of a temporary tax exemption on foreign income of certain migrants and returning New Zealanders, and updating the tax rules on securities lending to make New Zealand more attractive to international capital.
Business-friendly measures in the taxation bill introduced in May 2006 included improvements to the tax treatment of expenditure on geothermal wells, and changes relating to the sale of patent rights, to remove a potential barrier to investment in research and technology.
A Government discussion document released in June 2006 proposed codifying the tax rules on general partnerships and introducing new rules on limited partnerships, to complement the planned introduction of modern regulatory rules for limited partnerships.
Savings policy
The year saw continued consultation on the proposed reform of the taxation of income from share investments, whether through managed funds or direct investment by individuals. That reform was the main feature of the taxation bill introduced in May 2006.
Also proposed in the May bill were changes to the employer superannuation contribution rules to minimise the use of excessive "salary sacrifice" as a means of paying less tax, and changes to resolve compliance problems for people in New Zealand who have interests in Australian superannuation schemes.
Inland Revenue worked together with the Ministry of Economic Development and The Treasury on policy development for the KiwiSaver work-based savings scheme, the subject of a bill introduced in February 2006 by the Minister of Finance.
Rewrite of income tax law
The rewrite of the Income Tax Act continued through the year, resulting in the progressive release for public comment of exposure drafts of rewritten Parts F to O. The next step is the development of a rewrite bill for introduction into Parliament.
Child support legislation
The Child Support Amendment Bill, introduced in 2005, passed its second reading in Parliament by year's end. The bill allows a partial write-off of late payment penalties as an incentive for defaulters to begin making regular payments. It also gives Inland Revenue the powers to initiate administrative reviews of liable parents' financial affairs.
International arena
By year's end the new double tax agreements with Spain and Poland had passed through their final legislative stages in New Zealand and were awaiting entry into force. Amending protocols updating our double tax agreements with Australia and Singapore were awaiting completion of legislative procedures in those countries. The new double tax agreement with Chile, our thirtieth such agreement and our first with a Latin American country, came into force in June 2006.
The division continued to put considerable effort into OECD tax policy work, since international tax rules are increasingly set by the OECD. The focal point of our efforts during the year was to ensure that proposals affecting the taxation of branch profits maintain a reasonable balance between the interests of capital-exporting countries and capital-importing countries.
Revenue forecasting
Our Revenue Forecasting and Analysis unit regularly informed the government of the amount of tax collected against forecasts. It costed a wide range of tax and social policy initiatives and prepared tax revenue and social expenditure forecasts for the December 2005 fiscal update and Budget 2006.
Date published: 06 Nov 2006
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