Annual Report 2008: Part one - Policy, legislation and major initiatives
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. Business tax, reform of New Zealand's international tax rules and measures to make New Zealand businesses more competitive internationally, increase personal savings and encourage a culture of charitable giving, continued to be a major focus of policy work on the work programme to the end of 2008.
The year's policy highlights
Business tax
Rewrite of income tax law
October 2007 saw the historic passage of the nearly 3,000-page Income Tax Bill, which completed the 15-year rewrite of the Income Tax Act. The bill introduced the rewritten Act from Part F to the end of the Act and consolidated Parts A to E, which had been rewritten in earlier stages. The purpose of rewriting the Act was to produce income tax law that is clear, written in plain language and is structurally consistent. That makes it easier for users to find what they need quickly, and then understand it and apply the law. The resulting Income Tax Act 2007 applies to income derived from the 2008-09 income year.
Reform of partnership tax rules
Legislation tabled in Parliament in August 2007 introduced new tax rules for limited partnerships and updated and clarified the tax rules on general partnerships. The changes were part of the Limited Partnerships Bill, which also introduced new regulatory rules for limited partnerships that were designed to make it easier for New Zealand firms to have access to venture capital investment. The legislation was enacted in March this year.
Reducing tax costs for businesses
A government discussion document released in December 2007 sought feedback on a range of ideas aimed at reducing tax-related compliance costs for small and medium-sized enterprises. The taxation bill introduced in July 2008 contained the first stage of changes to emerge from the project, the raising of a number of tax thresholds. Lower thresholds can mean having fewer tax returns for businesses to complete, reducing the amount of information or number of calculations required for them to complete returns, and reducing the number of tax payments they must make.
Similarly, an issues paper released in November 2007 sought views on proposed legislative changes to ensure that employer payments for employee relocation expenses and overtime meal allowances are not taxable to the employees who receive them. These changes, which were intended to simplify the law and remove long-standing uncertainty about the tax treatment of these payments, were also included in the taxation bill introduced in early July 2008.
Modernising the tax rules
A consultative paper released in November 2007 sought comment on suggested legislative changes to update the petroleum mining tax rules, to remove disincentives to further investment in oil and gas exploration and development in New Zealand. In April the government announced that it would take steps to safeguard New Zealand's taxing rights on its petroleum resources. The resulting proposals were included in the taxation bill introduced in July 2008.
A government discussion document released in December 2007 sought comment on proposals to update the life insurance tax rules. The proposed changes, which were also incorporated into the taxation bill introduced in July 2008, seek to reduce the over-taxation of people who save through life insurance policies and to reduce the under-taxation of the term insurance business.
GST
A consultative paper released in June this year examined legislative options for strengthening the GST neutrality of business-to-business transactions and reducing the risks that GST can present to both businesses and the government. It also looked at possible changes to simplify and clarify the change-in-use rules and to clarify the GST treatment of short-term accommodation.
| The tax policy year | |
|---|---|
| July 2007 |
Finance and Expenditure Committee reports on Income Tax Bill. |
| August 2007 |
Limited Partnerships Bill introduced. |
| September 2007 |
Issues paper on tax consequences of the proposed emissions trading scheme released. |
| October 2007 |
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| November 2007 |
Four publications released for public consultation:
Finance and Expenditure Committee reports on Taxation (Annual Rates, Business Taxation, KiwiSaver, and Remedial Amendments) Bill. |
| December 2007 |
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| January 2008 | Government invites comment on matters to be raised in negotiating a new double tax agreement with Australia. |
| March 2008 |
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| April 2008 |
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| May 2008 |
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| June 2008 |
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| 2 July 2008 | Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill introduced. |
Climate change legislation
Consequential income tax changes providing for the tax treatment of the forestry sector under the proposed Emissions Trading Scheme were part of the Climate Change (Emissions Trading and Renewable Preference) Bill, which was introduced in December 2007. The bill was still before Parliament at the end of the reporting period. Provisions dealing with the income tax treatment of other sectors, as well as GST, were included in the taxation bill introduced in July 2008.
Liberalisation of tax penalties
Legislative changes enacted in December 2007 aimed at encouraging voluntary compliance by making the late payment penalty rules clearer, more consistent and better targeted. The changes relaxed a number of tax penalties, such as that for taking an unacceptable tax position, so that penalties reflect the seriousness of the offence. Associated changes included removing certain penalties when voluntary disclosures are made and not penalising taxpayers who occasionally pay late. Most of the changes came into effect on 1 April.
International policy: New Zealand's place in the world
Review of New Zealand's international tax rules
Consultation with business on the continuing review of New Zealand's international tax rules was a major focus of policy work during the year. The aim of the review is to bring our international tax rules into line with those of most other countries, to help New Zealand companies to compete more effectively overseas. The cornerstone of the reform is the proposed exemption from domestic income tax of the active income of the controlled foreign companies of New Zealand residents. Issues papers on details of the proposed changes were released for public comment in October and December 2007. Policy work for the remainder of the year concentrated on ensuring the changes emerging from the first stage of the reform were included in the taxation bill introduced in early July 2008.
Double tax agreements
The year saw a number of developments in our work on double tax agreements (DTAs), which play an important role in reducing the costs of doing business between countries. In October 2007 a DTA between New Zealand and the Czech Republic was signed. In November 2007 the government announced that the 1983 DTA between New Zealand and the United Kingdom would be updated, to strengthen cooperation in the enforcement of tax laws and collection of tax. In the same month the new DTA with Austria entered into force, bringing to 34 the number of DTAs to which New Zealand is party. In January this year the government invited comment on matters to be discussed in the forthcoming negotiation of a new DTA between New Zealand and Australia. Negotiations began in late March and were still in progress at the end of the reporting period. Negotiations began in June to update our 25-year-old DTA with the United States.
Personal taxes
Budget 2008 personal tax package
Budget 2008 announced personal tax cuts to take effect from 1 October 2008. The bottom personal tax rate was reduced from 15% to 12.5%, and the thresholds at which personal rates apply are to be raised over a period of three and a half years. Complementary changes to Working for Families Tax Credits increased the amount of entitlement to the family tax credit and raised the income threshold at which abatement starts. The bill was introduced on Budget day and passed under urgency the following day.
Income splitting
A government discussion document released in April this year sought comment on the idea of allowing families with children to split their income for tax purposes, to reduce the amount of income tax they pay.
KiwiSaver
Legislation enacted in December 2007 strengthened incentives to save for retirement through joining KiwiSaver or a complying superannuation fund. It requires employers to match their employees' contributions by up to 4% of their gross salary or wages, phased in over four years. The change was accompanied by the new employer tax credit to match member contributions by up to $20 a week, to help offset the costs to employers. Both changes complemented KiwiSaver incentives that were enacted in May 2007, in the form of the new tax credit to match member contributions by up to $20 a week. The latest changes came into effect on 1 April this year.
Fostering a climate of charitable giving
Also enacted in December 2007 were changes designed to increase incentives for New Zealanders to give more to charitable organisations. The tax rebate limits on charitable donations made by individuals and the deduction limit on charitable donations made by companies and Maori authorities were removed, and the company deduction for charitable donations was extended to include unlisted companies with five or fewer shareholders. The changes, which came into force on 1 April 2008, aligned New Zealand tax relief provisions for charitable donations with those offered in other OECD countries.
Legislation passed under urgency following the reading of Budget 2008 included remedial changes to provide tax certainty for various entities in the lead-up to the 1 July deadline for registration with the Charities Commission.
A government discussion document released in November 2007 canvassed views on the idea of introducing a voluntary payroll giving scheme, to make it easier for people to donate money to charitable organisations. An issues paper released in December 2007 for public consultation explored options for clarifying and simplifying the tax treatment of reimbursements and honoraria paid to volunteers. It sought feedback on suggested ways of dealing with uncertainties in the law relating to these payments, to reduce the associated compliance costs for volunteers and non-profit organisations. Changes relating to both proposals were included in the taxation bill introduced in July 2008.
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.
The unit's other main role was to produce Budget forecasts of tax revenue, working with The Treasury but forecasting separately. The unit worked with The Treasury and other areas of Inland Revenue to improve our ability to analyse revenue outturns, which is especially important in times of greater than usual economic uncertainty. 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 up-take of Working for Families Tax Credits.
Date published: 15 May 2009
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