The Inland Revenue has released its briefing to the incoming Government.
The Briefing for the Incoming Minister of Revenue 2011 (BIM) is available at www.taxpolicy.ird.govt.nz.
The BIM outlines view of Inland Revenue (IR) on key issues and the challenges for the tax system in the short-to-medium term and how they may impact on the new Government’s fiscal and economic priorities. It also outlines the key pressure areas for IR in administering the tax system.
The BIM provides interesting reading, presenting IR officials’ view of the state and performance of the tax system. It is meant to be impartial, free and frank.
The 2011 BIM does not contain any major surprises. The overall tax system gets a big tick. While we agree that the overall tax framework is sound, we expect that the framework will continue to be under pressure as other countries use their tax systems to favour certain investments and activities. New Zealand’s tax policy generally tends to go only as far as removing tax impediments, rather than providing positive tax incentives. The BIM indicates that IR retains a strong bias against use of tax incentives as an economic lever.
The taxation of savings and capital may challenge this approach.
This is borne out in the BIM on potential alternative tax systems to reduce the tax burden on capital. These approaches are an alternative to ‘Broad Base Low Rate’ (BBLR), as different tax rates would apply to different types of income.
The Nordic and Allowance for Corporate Equity models were considered by the 2010 Tax Working Group and discounted at least as short-to-medium term initiatives.
IR’s support for the current BBLR tax framework and its view that there should be a high threshold for changing the current course is consistent with that position.
However, other countries including Australia and UK are looking at alternative company tax models, which may renew interest in New Zealand.
From the Treasury BIM, it appears that the appropriate taxation of savings and capital remains an important economic issue. Although not necessarily a sign of tension between officials, it seems we can expect further consideration of New Zealand’s tax policy settings in this area.
The challenges
The issues around ‘Working for Families’ assistance abatements and high effective tax rates were raised in the last BIM (2008).
This remains therefore a perennial issue.
A solution to the policy trade-off between delivering targeted assistance to those in need on the one-hand, while managing the fiscal cost on the other seems no nearer.
A major overhaul of IR systems has been a long time coming.
Tied to this is the need for the department to deliver better value for money.
It appears this will be achieved, at least partly, by shifting current customer contacts (phone, written correspondence and over the counter contacts) to electronic channels to deliver efficiencies.
Businesses should take note, as this will not be costless.
The BIM fails to address how IR can provide greater certainty to taxpayers, who must know that the department says what it means and does it what it says.
That requires good tax policy design, clear drafting of the rules and a consistent approach within IR.
Paul Dunne and John Cantin are Tax Partners at KPMG New Zealand, based respectively in Auckland and Wellington.
