The Minister of Revenue, Hon Peter Dunne addressed the Auckland branch of the Financial Planners' and Insurance Advisors' Association at a breakfast meeting. His speech notes follow.
Wednesday, February 8th 2006, 2:11PM
As a result of the confidence and supply agreement between Labour and United Future, the term of this Parliament will be marked by a number of major tax initiatives, in addition to those measures already underway, and the ongoing programme of base maintenance through the various tax reform Bills each year.
We will have:
A major review of business tax arrangements, with changes taking effect from the start of the 2008 tax year;
A new regime for the tax treatment of charities and charitable donations;
A government discussion paper released on the merits of income
splitting for families.
We have already seen the cancellation of the proposed carbon tax.
All these moves were key United Future policy objectives.
In addition, from the start of April this year, under the extension of the
Working for Families package passed through Parliament at the end of last
year, a further 60,000 families will become eligible for Family Assistance
tax credits.
They range from a family with two children with an income of $45,000 a year
receiving $277 a fortnight, through to a similar family earning $60,000,
receiving $161 a fortnight.
This morning, I will talk about the business tax review, as well as some
other specific issues of particular interest to your sector.
Business Tax Review
No-one now doubts the need for a thorough review of business taxation to
ensure our tax arrangements remain at the very least competitive with major
trading partners like Australia, encourage investment and promote
productivity.
But, pressing as the demand is, simple quick fixes will not work.
The lazy "just cut the rate now, and worry about the details later" approach some have taken to promoting is at best a short-term solution only, whereas the real need is for far more substantive reform.
Chanting simple slogans are not going to be enough - the challenges we face
in the international market place are far more comprehensive than that.
Our major trading partner, Australia, is already looking at significant tax
cuts to both business and private incomes in next year's Budget and we
simply cannot afford to ignore what Canberra is planning.
Against that background, we have to do much better than simply gain a
brief, temporary advantage - we have to be far bolder.
The Minister of Finance and I are working actively with Treasury and IRD
officials on a range of options along these lines.
We plan to release a discussion paper in the middle of the year setting out
these options, to focus debate and invite stakeholder engagement.
Then, we will take decisions in time for legislation to be passed through
Parliament next year, so that the new regime can take effect in 2008.
This is precisely the timetable that would be followed for any major tax
reform.
Now, let me turn to some specific issues that are before us at the present
time, which will be the subject of action this year.
Taxation of investment
In mid-2005 the government released a discussion document proposing
comprehensive reform of the tax rules for investment income. Proposals
concerned the:
taxation of domestic investment through managed funds; and
taxation of offshore portfolio investment in shares
Over 800 submissions were received. Broadly, the domestic proposals were
supported by submissions, while the offshore proposals were overwhelmingly
not supported.
Domestic proposals
The government is concerned that people saving through NZ managed
funds (such as superannuation funds and unit trusts) are taxed more heavily
than people investing directly. The reasons for the overtaxation are:
A managed fund is in the business of investing so is generally taxed
on its realised share profits.
The fund is generally taxed at 33% while many investors' tax rates
are below 33%.
Proposal - investment through collective investment vehicles (CIVs)
that elect into the new rules would be taxed as follows:
Realised gains on shares in NZ companies would not be taxed.
Taxable income would flow through to investors in the fund and be
taxed at investors' personal tax rates.
Links to KiwiSaver:
CIV rules are necessary to prevent low income earners investing
through KiwiSaver funds from being over-taxed. Therefore it is important
to align the start date for CIV rules with the start date for KiwiSaver -
so both will start on 1 April 2007.
Offshore tax proposals
The proposal is to apply consistent tax rules for offshore portfolio
investment in shares. This would mean that investments into the seven
'grey list' countries would no longer receive a tax preference.
Investments into offshore shares through collective investment
vehicles would be taxed each year on the investment's change in value
(referred to as the comparative value approach). This would not
significantly increase the level of tax paid on such investments (as
realised share gains are generally already taxable to such vehicles).
Investments into offshore shares by individuals would be taxed on a
similar basis, but with significant concessions - namely:
Taxable income would be capped at the greater of 6% of the
investment's value and the cashflow from the investment.
ยง Gains above 6% would be taxed when the investor sells the offshore
shares and does not purchase additional offshore shares. (In other words,
an investor could switch offshore investments without triggering the
additional tax.)
Individuals with offshore investments valued below NZD$50,000 would
continue to pay tax only on dividends.
Submissions
Almost all submissions concerned the offshore proposals and were
overwhelmingly negative. Key concerns of submitters are that:
The proposed changes would tax capital gains (when there is no such
tax on domestic investments).
They would increase tax on investments into Australia - so would be
anti-CER.
They would penalise those who have a diversified portfolio.
The rules would be too complex for individuals to comply with.
The government is listening to concerns and consulting on a modified
proposal for offshore investment that takes account of submitters' key
concerns, while retaining the key policy aims of the original proposals.
Next steps
Officials are currently consulting with stakeholders on:
modifications to the offshore proposals;
various issues raised with the flow-through proposals for collective
investment vehicles.
The government hopes to be in a position to make some announcements
on modified proposals in March this year.
We are working towards introducing domestic and offshore proposals in
a tax Bill in May this year, with application from 1 April 2007.
The government is concerned about increased tax planning through
salary sacrifice and tax planning schemes using the substitution of salary
or wages for employer contributions to a superannuation fund. Under
present law, the tax rate on employer contributions is based on the
marginal tax rate of the employee's salary or wages paid by that employer.
An officials' issues paper released on 1 February outlined suggested
legislative changes to minimise such tax planning schemes.
The preferred option is to tax employer superannuation contributions
at the marginal tax rate of the employee, based on sum of the employee's
salary or wages and employer superannuation contributions. The personal
tax rate thresholds would be increased by 15% to prevent over-taxation when
an employee moves across a threshold as a result of the employer's
contribution.
Submissions close 15 March. Based on the feedback they receive,
officials will report to the government with formal recommendations for
change.
The government intends to include resulting legislative changes in a
tax bill to be introduced in May.
KiwiSaver
Details of the KiwiSaver scheme were announced in Budget 2005.
Broadly,
KiwiSaver is a voluntary, work-based saving scheme, due to start in
April 2007, to help New Zealanders save. Inland Revenue will generally
administer the scheme using the existing PAYE (pay as you earn) tax system.
Savings will be primarily for retirement and will be locked in until
age of eligibility for NZ superannuation, although exceptions will be made
in certain cases such as financial hardship and withdrawals after a minimum
of three years, to contribute towards a deposit on a first home.
One of the key features of KiwiSaver is the portability of a saver's
funds. The scheme will provide the mechanism for the transfer of funds to
a foreign superannuation scheme when a saver emigrates.
The government will make an upfront contribution of $1000 per person,
to be locked in until the recipient reaches retirement age -or for five
years - whichever is the greater.
After three years of savings, the government will offer the saver a
first home deposit subsidy of $1000 per year of membership, to a maximum of
five years.
Officials have continued working with employers/employer
association/providers/and others on the policy design and implementation.
A KiwiSaver bill is planned for introduction at the end of the month.
This article is speech notes from a recent address to the Auckland branch of the Financial Planners' and Insurance Advisors' Association, by the Minister of Revenue, Hon Peter Dunne.
