Opening Address to ATAINZ Tax Conference
Thank you for inviting me here today. It is always a pleasure to address tax professionals.
I’m especially pleased to be here given the theme of your conference, The Future Moving Forward.
That’s a very topical issue and something that I am deeply interested in.
Taxation is a necessary part of society as long as government is required to provide services such as health and education, police and defence, conservation and civil defence.
Yet today, it seems to me that our tax system and in fact tax systems around the world, are at a cross roads.
The design of tax systems is crucial if adequate revenues are to be raised over the medium term in the face of challenges.
A good tax system, as you know, comprises good tax policy supported by a strong tax administration.
Tax policy in New Zealand is in a very strong position.
Our broad-based, low rates framework, backed by a good system of public consultation means that policies are efficient, effective and practical and aim to be fair and minimise compliance costs.
Following the Global Financial Crisis, many tax jurisdictions around the world who do not share our broad-based, low rate tax framework face the pressing issue of sustainable revenue raising.
For New Zealand, this is not our top concern. We are on track to restoring the Government’s books to surplus, but that doesn’t mean we stop being fiscally responsible.
Our tax policy gives businesses the certainty and predictability they require.
So I do not envision any great changes to the direction of tax policy.
I want to talk to you today about a tax administration for the future.
I understand that Inland Revenue’s Deputy Commissioner, Mike Cunnington will provide you with more detail about the programme to modernise our tax administration, but I’d like to give you an overview.
Our top priority for the tax system is modernising the way the tax system is run so that it keeps pace with taxpayers’ expectations and Government’s needs.
A new tax administration
The last time I was here, I spoke briefly about the high level design of IRD’s change programme.
I told you there were to be four stages to the work.
The first is to enable secure digital services and includes work to improve the collection of PAYE and GST information from business. Having established that, we’d move on to streamlining income tax and business tax processes.
The third stage would look at streamlining the delivery of social policies that IRD administers such as Child Support and Working for Families tax credits.
And stage 4 rounds off the transformation ensuring that all remaining aspects of the tax system are brought into the new administration.
I also told you last year that I wanted Inland Revenue to think of some options. I’m pleased to be able to give you today a clearer idea of how the future could look.
You may wonder why it has taken this long to get to this point.
The answer is because there’s a lot riding on it so we’ve got to get it right. We can’t afford to rush into this with ill-conceived ideas.
More than most, you know the importance of taxes to the Government and to the people of New Zealand.
While they are valuable in funding necessary services, taxes also impose costs: administration, compliance costs and distortionary costs. An efficient tax system keeps these to a minimum.
Our tax system rests on voluntary compliance, and for this to continue working, we need the tax system to be fair and seen to be fair.
It should be as easy as possible for those who want to do the right thing to comply. Equally it should be difficult for taxpayers not to comply.
This will become more and more important as we look to the future. An ageing New Zealand population creates extra fiscal pressures. That should not automatically mean higher tax rates or new taxes.
The responsible thing to do is to take every step we can to ensure that the way we administer the tax rules works as well as possible. That’s what the transformation of Inland Revenue is all about.
It has to be a sound investment for New Zealand.
If we’re going to make this work, it can’t be by shifting costs from the government to taxpayers.
The reforms will not be successful if administration costs are cut but we see compliance costs rise and total costs for New Zealand as a whole increase.
And of course the Government is keen to ensure we do not stifle enterprise. We want to ensure we provide an environment where businesses can get on with growing their businesses and spend less time on meeting tax obligations.
So in considering the direction and objectives of the programme of work to modernise tax administration, we need to balance minimising the costs of raising taxes with fairness concerns and ensuring the tax system promotes compliance.
The issue of compliance costs, especially for SMEs, will be a priority but always with regard to ensuring the integrity of the system and fairness to all taxpayers. And of course we need to maintain the Government’s revenue.
The focus will be on providing simpler, not concessionary solutions.
For instance, imagine a business starting up. At present, they would need to register separately as a business with Inland Revenue, as an employer and for GST. This is a small example of the sort of irksome thing which ties people up in red tape, when they would be better off spending that time on getting their business profitable.
It should be possible for that business to purchase an accounting software package which takes care of all those separate transactions with IRD in one go.
For employers more generally, we will also be exploring wider simplifications such as replacing the employer monthly schedule with information which is more directly linked to payroll systems.
And of course, calculating provisional tax presents problems for some taxpayers.
As much as possible we want firms to be paying tax during the year as income is earned. This is consistent with the way in which other taxpayers are taxed. But at the same time we want to make this as painless and easy to comply with as possible.
We will be exploring whether there are ways of making improvements in this area.
We also need to improve tax payment efficiency.
How taxes are paid imposes compliance costs and Inland Revenue’s efforts to collect taxes comes at a cost to the taxpayer. It is our responsibility to make sure that we are minimising compliance costs and using those tax dollars prudently.
It should come as no surprise that international studies have found that certain forms of tax such as PAYE are much more efficient at collecting tax than others such as self-declared income.
An important question will be whether there are good ways of making it easier for those who want to comply with the tax rules and harder for those who don’t.
A practical difficulty is in getting rates of withholding as good as possible and minimising the costs of square ups when it is later discovered that insufficient tax has been withheld.
Modern technology may help by making square ups less costly.
The Government will be exploring whether we can provide more extensive prepopulated information on tax returns available to individual taxpayers. For a person with simple affairs and without business, rental, or foreign income, filing a tax return might be no more complex than simply saying whether the sources of income that Inland Revenue has identified are their only sources of income.
We will also be exploring whether we can simplify square ups with automatic bank transfers to those who have paid too much and adjusting withholding rates for those who have paid too little.
There is scope for simplification for those with more complex tax affairs.
Suppose you have a staff member for instance who has child support obligations while repaying a student loan and who receives a Working for Families entitlement.
It should be possible for your payroll software to automatically send that employee’s information to and from Inland Revenue as part of each weekly pay cycle, with his student loan repayments and Working for Families entitlement being automatically calculated and updated.
If that happens, it means that payroll staff do the job once and do it right. No need for the current situation where IRD contacts employers to correct information.
Improvements may also be possible in the rates at which secondary tax is withheld. More timely employment information may allow Inland Revenue to interact with employers to get better rates of withholding.
This sort of approach should considerably ease the compliance burden on the employer and the staff member’s working for families and various obligations would be accurately calculated so there would be no need for an end of year square-up.
The objective is to simplify, and to modernise and to make it easy to comply and hard to get it wrong.
This is just a taster of what it could all look like. Over the coming year I intend to release public consultation into all these matters. The first discussion document will focus on the big picture and subsequent ones will provide finer detail and concrete proposals.
It will be hugely important that all New Zealanders consider these proposals and their implications for themselves.
In the past, ATAINZ has made submissions on policy proposals, I hope and trust that you will engage with this very important matter.