Annual Report 2007: Part one - Working to achieve Government priorities

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 policy-making 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. Much of the year's policy work was related to the Business Tax Review and to business tax and savings reforms announced in Budget 2007 - themes of which were transformation of New Zealand's economy and its savings culture.

The year's policy highlights

Business Tax Review

The government's Business Tax Review discussion document, released in July 2006, canvassed views on a range of possible tax initiatives intended to increase productivity and boost New Zealand's international competitiveness. Options included reducing the company tax rate to 30% and introducing targeted tax credits to encourage businesses to innovate. The discussion document was followed by further extensive consultation and policy development, the results of which were announced in Budget 2007.

Budget business tax reform package

The business tax reform package announced in Budget 2007 constituted the most substantial business tax changes to be announced since the late 1980s. They included a reduction in the company tax rate to 30%, an associated reduction in the tax rate for certain savings vehicles, and the introduction of a 15% tax credit for research and development (R&D).

Legislation contained in a bill introduced on Budget day and enacted under urgency gave effect to the reduced company tax rate and to the associated reduction for certain savings vehicles. The R&D tax credit and tax changes resulting from the reduction in the company tax rate were part of a second bill introduced on the same day - the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill - which was before Parliament at the time of reporting.

Review of New Zealand's international tax rules

As part of the business reform package, the government announced that it would proceed with the introduction of a tax exemption for the active income of New Zealand's controlled foreign companies. The matter was the subject of a December discussion document on proposals for changing our international tax rules to increase the competitiveness of New Zealand companies operating overseas.

Following the release of the discussion document, officials undertook intensive consultation with the private sector on the proposals, a process that is expected to continue until late 2007. The aim is to produce proposals that meet government policy objectives as well as business concerns about simplicity and certainty.

KiwiSaver and associated savings reforms

The year saw several legislative reforms aimed at making it easier for people to save and at improving the tax treatment of savings through collective investment vehicles.

KiwiSaver legislation

Legislation enacted in September paved the way for the introduction in July this year of the voluntary savings scheme KiwiSaver, which is largely administered through the tax system. Policy development of KiwiSaver has involved the combined work of the Policy Advice Division, The Treasury and the Ministry of Economic Development.

Budget 2007 announced additional incentives for people to save with KiwiSaver. They included a member tax credit of up to $20 a week; compulsory matching contributions by employers of up to 4% of employees' gross salary or wages - to be phased in over four years - and a tax credit for employers of up to $20 a week for each employee to reimburse them for their contributions.

Legislation introduced on Budget day and enacted under urgency gave effect to the new tax credit for eligible members of KiwiSaver schemes. It also made technical changes to the portfolio entity tax rules that were designed to ensure the smooth introduction of KiwiSaver. The remainder of the proposed KiwiSaver incentives were part of the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill, which was before Parliament at the time of reporting.

Taxation of share investment income

In November, officials reported to Parliament's Finance and Expenditure Committee on submissions received on the Taxation (Annual Rates, Savings Investment and Miscellaneous Provisions) Bill, which had been introduced in May 2006.

The bill proposed new tax rules on investment income from share investments made through managed funds and by individuals investing overseas. Changes also included the introduction of new rules that prevent lower-income people who save through managed funds - including KiwiSaver schemes - from being overtaxed on their earnings.

The bill attracted over 3,000 submissions, a record for a taxation bill. Most submissions were devoted to the offshore share proposals, with the vast majority opposing the idea of taxing offshore portfolio share investments on 85% of any gain in value over time. In response, the select committee held several hearings around the country, which policy officials attended in an advisory capacity. Officials then worked closely with ministers, committee members and interested parties over the next three months to develop an acceptable alternative for taxing these investments, with the fair dividend rate method emerging as the one that was adopted in legislation.

The bill passed through its remaining stages in Parliament in December.

Tax incentives to encourage charitable giving

Budget 2007 also announced tax incentives to encourage charitable giving, measures designed to align New Zealand tax relief provisions for charitable donations with those offered in other OECD countries. The changes, which are also part of the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill, remove the tax rebate limits on donations made by individuals and the deduction limit on charitable donations made by companies and Maori authorities.

The announcement was preceded by the release in October of a government discussion document that looked at the use of tax incentives to promote charitable giving, and by a series of consultation workshops held around New Zealand in November and December.

Review of the taxation of life insurers

The government announced in August that it would carry out a comprehensive review of the life insurance tax rules, to bring them up to date with the current commercial, regulatory and savings environments. Two issues papers were released for consultation with the industry - one in September and the other in February.

Rewrite of income tax law

The fifteen-year rewrite of New Zealand's income tax law, to make it easier to use and understand, entered its final stage in November with the introduction of the 2,706-page Income Tax Bill. The bill rewrites the Income Tax Act from Part F to the end of the Act and re-enacts and consolidates Parts that were rewritten earlier. The bill was before Parliament at the end of the report period.

Double tax agreements

The year saw major developments in our work on double tax agreements (DTAs), which play a key role in reducing the costs of doing business between countries. During the year, new DTAs with Chile, Spain, Poland and Mexico entered into force, bringing to 33 the number of DTAs to which New Zealand is a party. In January, the New Zealand and Australian governments announced that the two countries had agreed to start the process for negotiating a revised DTA. In September, Austria and
New Zealand signed a double tax agreement that is expected to come into force in the second half of 2007.

Liberalisation of tax penalties

Proposed changes that result in the relaxation of tax penalties, such as that for taking an unacceptable tax position, so that penalties reflect the seriousness of the offence, are a major feature of the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill. Associated changes include removing certain penalties when voluntary disclosures are made and not penalising taxpayers who occasionally pay late. The changes are intended to make the penalty rules clearer, more consistent and better targeted to encourage voluntary compliance.

Student loans

Legislation introduced in November and enacted in March introduced new rules to make repayment easier for borrowers who are overseas and simplified the administration of the student loan scheme. Changes for overseas borrowers included a repayment holiday of up to three years, new repayment obligations, extension of "interest-free" loans to full-time undergraduates, and extension of the amnesty for non-resident borrowers in arrears. Other changes included a reduction in the late payment penalty for all borrowers and allowing data matching between Inland Revenue and the New Zealand Customs Service, to identify entitlement to interest-free loans.

Child support

Other legislative changes that took place during the year made improvements to the administration of child support laws.

A bill passed in September introduced changes aimed at getting non-paying parents back into the child support system. Changes included a partial write-off of late payment penalties for those who agree to resume their payments, and strengthening of Inland Revenue's powers to investigate liable parents' financial affairs.

Changes introduced in the Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Matters) Bill allow information sharing between Inland Revenue and the New Zealand Customs Service, for collecting child support payments. That will allow Inland Revenue to identify when people with outstanding child support debt enter or leave the country.

Revenue forecasting

During the year the division's Revenue Forecasting and Analysis unit continued to play a key policy role in its work of quantifying the fiscal implications of proposed legislative changes at an early stage in the policy development process. Highlights for the year included work on the introduction of KiwiSaver and examining the fiscal implications of the options canvassed in the Business Tax Review discussion document, especially those of reducing the company tax rate and the resulting flow-on to other taxes.

The unit's other main role was to produce Budget forecasts of tax revenue, working with The Treasury, but forecasting separately. It was also responsible for producing expenditure forecasts of social policies administered through Inland Revenue, and supplying answers to quantitative parliamentary questions, such as those relating to income distribution and take-up of family assistance.

Other pages in: Part one - Working to achieve Government priorities

• Introduction
• KiwiSaver
• Sustainability

Date published: 23 Oct 2007

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