Pre-Budget Speech to Business New Zealand event
It’s good to be back here for my annual pre-Budget speech and I want to thank Business New Zealand for hosting me once again.
This year’s Budget will be delivered against a backdrop of a growing economy, supported by strong levels of tourism and migration, a large pipeline of construction projects and low interest rates.
Notwithstanding challenges in the dairy industry, most New Zealand forecasters are predicting growth of around 3 per cent on average over the next few years.
That’s a good position for the country to be in.
In fact, over the last five years New Zealand has had one of the fastest growth rates in the OECD.
However, nothing is guaranteed.
There are always risks, and at the moment these revolve around issues like the ability of China to smoothly negotiate its economic challenges.
On the other hand, the economy could do better than forecast.
That’s why the Government takes a medium-term approach to fiscal policy, looking through ups and downs and focusing on the overall path of the Crown’s finances.
That path shows increasing surpluses and government debt falling below 20 per cent of GDP, in line with the Government’s objectives.
Every year at this event I try to talk about an aspect of the Budget that’s relevant for Kiwi businesses and I’m going to do so again today.
Last year you might recall I announced an increase in Callaghan Innovation’s co-funding budget.
Our efforts to raise business innovation are paying dividends, with a Statistics NZ survey last week reporting a 15 per cent lift in business R&D activity in just one year.
Today I’m going to announce some tax changes that will be positive for businesses, and especially for smaller businesses.
But before that I want to run through some of our other activities in the business space.
The first point I want to make is that government is a big business in its own right.
We own and operate hospitals and schools, for example, provide law enforcement and defence services, and run transport, electricity and housing businesses.
Excluding transfers, we are a quarter of the economy.
Our biggest contribution to New Zealand’s productivity is in running our 25 per cent better.
And by keeping our spending in check we reduce some of the burden on taxpayers and provide more space for the internationally competitive sectors of the economy to grow.
So the Government is continuing to get its own house in order – making sure we are good providers of services and good owners of assets.
In our welfare and social housing reforms, for example, we are promoting more competition, using more commercial tools like actuarial valuations, and focusing on getting our customers back to independence.
A private sector business needs to understand its customers because they drive its revenue.
We need to understand our customers because they drive our costs.
We are digging into these costs and the information is leading to important changes in the public sector.
Alongside other programmes, this approach is helping to reduce government spending as a proportion of GDP, as well as getting better results for New Zealanders.
The Treasury has calculated that in structural terms – so not including cyclical factors like whether the economy is in a boom or a recession – government spending increased by eight percentage points of GDP between 2004 and 2009.
That increase was simply unaffordable and would have seen a blowout in government debt.
In response, our approach has been to reduce Budget operating allowances, make efficiency savings across the public sector, and shift the focus of government agencies onto working together to achieve results under an assumption of limited new funding.
As a result, we have reversed most of that increase in spending from the mid-2000s and got the operating balance back into surplus.
So an important role for the Government in supporting business activity is to keep its own house in order.
Another is to provide an environment where businesses can be flexible and resilient.
The business growth agenda is the master list of hundreds of government initiatives in this area.
Let me mention just a few.
New Zealand’s future is in being an open, outward-facing country, welcoming of people and ideas from other countries, and part of wide-reaching global supply chains.
It’s worth reminding ourselves that 99.9 per cent of the potential customers for our products live overseas.
Many of these are in the fast-growing Asia-Pacific region that surrounds us.
That’s why the TPP agreement is so important – it puts a crucial piece into the jigsaw.
When TPP comes into force, New Zealand will have free trade relationships with China, Hong Kong, Chinese Taipei, Japan, Korea, the ten ASEAN countries, Australia, Chile, Peru, Mexico, the United States and Canada.
That’s pretty much the entire Pacific Rim.
In particular, our TPP partners the United States and Japan are the biggest and third-biggest economies in the world.
A quarter of all household consumption in the world happens in America.
So we need to be in TPP – it keeps us connected to the world.
So too does ultra-fast broadband.
It makes the world smaller for New Zealand businesses, helps their productivity and makes them more competitive.
Our ultra-fast broadband programme has businesses as one of its top priorities, alongside schools and hospitals.
Our goal was to have 90 per cent of businesses in UFB coverage areas able to connect to faster, more reliable broadband by the end of 2015.
We exceeded that target.
In fact, 97 per cent of businesses in these areas – more than 200,000 firms – can now connect to UFB.
Technology is changing the way New Zealand firms do business.
It should also change the way they interact with the Government.
One of the Government’s 10 key result areas, alongside things like reducing welfare dependency and increasing educational attainment, is to ensure that New Zealanders can complete their transactions with the Government easily in a digital environment.
Two areas we are focusing on are ACC and tax.
Both are going through big transformation programmes.
Improvements to ACC have also led to significant levy reductions.
In total, employers, workers and motor vehicle owners are now paying $2 billion a year less in levies than they were five years ago – the equivalent of a sizeable tax cut.
In 2011/12, employers paid $1.47 in work account levies for every $100 of their payroll. Now they pay 80 cents.
Back then, the average ACC levy per motor vehicle was $335. Now it’s only $130 – a reduction of over 60 per cent.
ACC also launched a five-year transformation project, with a focus on improving the service it provides to business customers.
The programme includes digital services that will provide businesses with real-time information on injury rates and trends in their workplaces, and support them to develop more effective injury prevention initiatives.
Technology is also affecting the way businesses interact with Inland Revenue.
Around 30 to 40 per cent of businesses currently use cloud-based accounting software but this is expected to grow to 85 to 90 per cent in the next 10 years.
We want the tax system to fit in with how businesses operate, not the other way around.
That’s the idea behind Inland Revenue’s business transformation project.
The intention is for businesses to see information and interact with Inland Revenue through an on-line account.
Compliance costs will be reduced by using a business’s normal processes and systems – especially accounting systems – to meet tax obligations.
This will make it easier for businesses to get things right and harder to get things wrong, allowing them to focus on running their businesses with tax as a secondary consideration.
The move to a new information system provides an opportunity to revisit New Zealand’s business tax rules.
We have grasped that opportunity.
So what I want to announce today is a new SME-friendly tax package that I think will be welcomed by all businesses, and especially by smaller ones.
The package will make paying tax easier and more certain, reduce the burden of interest and penalties, and help smaller businesses tailor payments to their own circumstances.
I think everyone acknowledges that meeting tax obligations is a particular challenge for smaller businesses.
Among other things, businesses tell us that provisional tax is hard to get right and expensive to get wrong.
Perfect accuracy can sometimes be costly in a way that doesn’t seem justified.
And some penalties are seen as punitive and discourage compliance.
So we have developed this tax package to make it easier for smaller businesses, in particular, to comply with their tax obligations and therefore reduce costs and distractions.
There are three main parts to this package.
The first relates to provisional tax.
Among other things, we are going to eliminate or reduce use-of-money interest for the vast majority of taxpayers.
And we are going to give small businesses – those with a turnover of less than $5 million – the opportunity to choose a new “pay-as-you-go” option for provisional tax.
The way provisional tax currently works is that people, by one method or another, estimate their likely tax bill for the coming year and pay that amount in three instalments.
This new option drops the estimation part and instead works out your tax payments on an ongoing basis throughout the year.
Every two months your accounting software will calculate your taxable income for that period.
You’ll be prompted to make the right tax payment directly through your accounting system, and generally at the same time as you pay GST.
Under this new “accounting income method”, provisional tax payments will more accurately match income as it is earned, be made more regularly and be integrated into normal business practices.
Use-of-money interest won’t apply to taxpayers who choose this method and who pay their tax on time.
Up to 110,000 small businesses could be eligible to use the accounting income method, starting from 1 April 2018 when Inland Revenue’s new computer system is up and running.
I welcome this initiative because it means small business owners and managers can get on with running their businesses rather than being tied up in tax compliance.
That’s what we want and what businesses want, so it’s a win-win.
I mentioned use-of-money interest a moment ago.
This, as you know, is paid, or received, on the difference between a business’s actual tax liability for the year and what they paid in provisional tax.
This is only known at the end of the year.
We want to get a lot more businesses out of the use-of-money regime because interest charges are often burdensome and frustrating for taxpayers who are simply following the rules.
The accounting income method will help do that for many small businesses.
In addition, taxpayers who continue to use what is currently the most common method for calculating provisional tax – the standard or “uplift” method – won’t be subject to use-of-money interest if their tax liability for the year is under $60,000 and their tax is paid on time.
That includes companies, as well as individuals, and will take up to 67,000 taxpayers out of the use-of-money interest regime altogether.
For taxpayers with a tax liability above $60,000, and again who use the uplift method, use-of-money interest will only apply from the third and last instalment of provisional tax.
This change potentially benefits a further 19,000 taxpayers.
It will also give bigger taxpayers the chance to do a “square up” in their last instalment, since by then they’ll have a good idea of their actual tax position for the year.
In that case, they will have paid the right amount of provisional tax so won’t be subject to interest.
The combination of all these changes means that the vast majority of taxpayers either won’t pay use-of-money interest or will pay significantly less than they do now.
That’s the first part of the package – provisional tax.
The second part of the SME-friendly tax package I’m announcing today gives more flexibility for contractors to choose a withholding rate that suits their individual circumstances.
Payments to around 130,000 contractors each year have withholding tax deducted from them.
Many of you will have seen the form that says if you are a shearer you’ll have payments withheld at 15 per cent, if you’re a freelance journalist they’re withheld at 25 per cent, cleaning contractors at 20 per cent, and so on down the list.
You may well have scratched your head at these differences.
We are going to make the system more flexible.
From 1 April 2017, it will be easy for contractors to choose their own withholding rate, subject only to a minimum of 10 per cent.
This means contractors can take into account their individual circumstances, which of course they know better than anyone else.
If an accurate rate is chosen, contractors may no longer be forced into an “over-withholding” situation or an “under-withholding” situation that could see them liable for provisional tax.
It’s in their interest to get it right.
Contractors who aren’t currently subject to withholding tax rules will also be able to elect into this system, with the payer’s agreement.
And withholding tax rules will be extended to contractors engaged through labour hire firms.
The third part of the business tax package is about late payment penalties.
For new debts after 1 April 2017, the 1 per cent ongoing monthly penalty will be scrapped for income tax, GST and some other payments.
The immediate penalty that applies to late payments, and the 4 per cent penalty after a further week, will remain.
So will use-of-money interest on overdue tax.
But a 1 per cent monthly penalty on top of all this, as we have at the moment, makes the combination of penalties and interest very burdensome.
We need to be realistic.
Building up a very large debt to Inland Revenue is often an ineffective way to get individuals and businesses to resolve their tax situation.
And a large portion of penalties is uncollectable and is simply written off.
The Government encourages compliance and wants to give taxpayers more opportunity to talk to Inland Revenue and work out a way to repay their tax debts before they become too big to resolve.
So these are the new measures we’re introducing for provisional tax, withholding tax and penalties.
There are a few more parts to the package but those I’ve talked about today are the main ones.
Inland Revenue is releasing an issues paper today that goes through everything in the package in great detail, as you’d expect.
Your feedback is welcome.
The whole package will cost $187 million over four years and comes out of the new spending allowance for this year’s Budget.
Some of the more complex measures will be implemented through Inland Revenue’s new IT system in 2018, but most of the changes will begin on 1 April next year.
Ladies and Gentlemen.
This is just one of the many measures you will see in the Budget on May 26.
That Budget will continue the National-led Government’s track record of responsible fiscal management.
It will contain initiatives to help build a more productive and competitive economy and to deliver better public services.
And it will show how the Government is continuing to support the rebuild of Christchurch.
Forecasts will show a growing economy, rising employment and higher wages.
New Zealand is in good shape.
The Government has a busy programme ahead of it.
Providing we stick with that programme, I’m confident we can deliver the opportunities and security New Zealanders and their families deserve.