Source: New Zealand Government
Speech to the CAANZ conference – November 19, 2020
Thank you, Greg, (Greg Haddon, MC) for the welcome.
I’d like to acknowledge John Cuthbertson from CAANZ, the Commissioner of Inland Revenue Naomi Ferguson, former fellow MP and former Minister of Revenue, Peter Dunne, other guest speakers and CAANZ members.
I am genuinely pleased to be here today. I have had an interest in tax since studying law and commerce at Otago University where I did elective papers in tax in both my law degree and my accounting degree. While I have much to learn, I understand the principles which are supposed to underlie a fair and efficient tax system.
Over the years I have experience in tax as a payer, an advisor and a legislator.
Through my interests in small business I did GST returns and PAYE returns for many entities for many years. I have stood in queues to pay stamp duty and know what curtilage is. I gave the early legal advice and was early counsel in CIR v Newman; the case which determined the bounds of what scale of subdivisional activity is a business undertaking for GST purposes.
I have been a director or CEO of more than a dozen companies in a wide variety of industries.
Throughout my legal, business and political careers tax rules have been relevant – to all of them.
I recognise the hugely important role taxation has in sending investment signals to business and the fundamental importance of tax policy on social equity.
I have seen the improvement computerisation has brought to tax administration, vastly reducing compliance costs.
All of these factors, and my personal interest, is why I specifically asked the Prime Minister for the Revenue portfolio.
I look forward to engaging with you on important tax issues over the next three years.
I would like to acknowledge my predecessor Stuart Nash for his work over the past three years and the work of Finance Minister Grant Robertson, in particular how they leveraged the tax system to aid in our response to COVID-19.
I am also looking forward to working with Dr Deborah Russell who has been appointed Revenue Undersecretary. Her extensive tax background, including co-authoring a book about New Zealand’s tax system, will also be helpful over the next three years.
Adapting to change – the theme of this year’s conference – seems apt, given the amount of change COVID-19 has forced on our lives in 2020. Lockdowns, closed borders and the need to wear masks was not how we envisioned our lives at New Year’s as we headed into this new decade.
Response to the Pandemic
Despite the challenges, New Zealand’s response to the global pandemic has been world leading. The very fact that we can gather in person here today, at this conference, is a testament to how well we have responded.
We were the first country to go into a strict lockdown relative to first Covid death. Our lockdown covered the whole country and was the strictest in the OECD. It had strict rules to ensure isolation broke the chain of Covid that was already rapidly escalating in various parts of New Zealand. Had we not broken the chain of transmission, the exponential growth seen overseas would have occurred here. Back then we could not properly track and trace for a number of reasons, including the then worldwide shortage of test kits and PCR test reagents.
We were one of the first, and I would say the quickest, to roll out support to those impacted by the pandemic. We cushioned the blow because it was the right thing to do to maintain the social contract needed to overcome the virus. We increased main benefits by $25 per week for the same reason.
The wage subsidy is a key support measures aimed at keeping workers attached to their workplaces. It is a simple scheme. We got the money out the door and into people’s wallets very quickly thanks to swift decisions by Cabinet and the impressive efforts of MSD and IRD. I thank them both. Teams of people working day and night throughout the country helped maintain that essential social cohesion in our team of five million.
At its peak, two thirds of the labour force was supported by the subsidy. In total 1.6 million people received it.
Inland Revenue and the tax system also played an important role through measures like the Small Business Cashflow (Loan) scheme, the loss carry back scheme, and remitting use of money interest (UOMI), to name but a few.
Due to our collective response to Covid we were able to protect the long- term health of our people and achieve the open economy we now enjoy. We chose to forgo some freedoms short term for our collective good. Our choices have served us well so far.
While we are still on a perilous journey in this ongoing crisis, there are encouraging signs that reinforce the choices we’ve made. The unemployment rate earlier this month was 5.3%, well below the range of early projections (some of which were dire), much less than the 9% prediction we faced in the Budget, and well below the OECD average of 7.4%.
We’ve also seen expansion in the manufacturing and services sectors in September. Consumer and business confidence both improved in October.
High levels of voluntary compliance are key to the success of taxation, and have been especially important in the fight against COVID-19.
An important building block of the social cohesion that allowed us to so successfully battle the pandemic was our willingness as “a team of five million” to follow guidelines such as on social distancing, “stay in your bubble”, hand washing and mask wearing.
The social theory which lay behind our Covid response had many layers. Communication had to be honest and clear both as to risks of calamity and the behaviour required to avoid that outcome. To work we knew the vast majority of people had to comply voluntarily.
That volunteerism both drew upon our high levels of trust and social cohesion and then in turn built even deeper social cohesion in New Zealand. New Zealanders are rightly proud of their society, and the contrast with other countries makes ours look pretty good.
Whilst voluntary compliance is key, that in turn relies on people knowing there is a legal back stop – that there are sanctions on those who do not follow the actions needed and threaten the efforts of all.
Interestingly, the tax system works in much the same way. We rely on the majority of people to pay the right amount of tax, which is buttressed with clear rules and enforcement powers to be used on those individuals who do not do the right thing.
Like our response to the pandemic, this approach works because our tax system is in most respects fair and coherent. People by and large understand that paying taxes is for the greater good – that is to fund important public services they want for themselves, their families and others.
A tax system that is fair and coherent – and is complied with – is essential to this country’s continued stability and prosperity. As the new Minister of Revenue, these are features of our tax system that I want to maintain and strive for.
The Government’s priorities over the short-term
On Covid, while it’s important to recognise our achievements to date, we are still not out of the woods, and New Zealand is not spared the ongoing effects of this global pandemic.
This is why the first item of business for Cabinet was making improvements to the Small Business Cashflow loan scheme to provide ongoing support as we rebuild from COVID-19.
The small business sector makes up 97% of all enterprises and approximately 29% of all employees, and we want to play a greater role in countering instability through access to capital.
Close to 100,000 businesses have received the loan, with total lending of $1.6 billion. Feedback from businesses has been extremely positive and we have been told the support was provided at a time when it was most needed.
The scheme has been a success. That’s why we have:
- extended it for three years,
- increased the interest free period from one year to two years, and
- broadened what loans can be used for, such as capital items.
These changes fulfil our pre-election commitments, benefit existing borrowers, and make the scheme more attractive to prospective borrowers.
These changes are estimated to result in additional lending of $133 million to small businesses.
I have asked officials to provide further advice, before the end of the year, on changes to the scheme that will allow more businesses to benefit from it, such as adjusting the eligibility criteria for the loan.
Inland Revenue, MBIE and Treasury will also provide advice on wider issues such as the Wage Subsidy Scheme, the Business Finance Guarantee Scheme, and various business capability building initiatives next year.
We are also looking at new ways to support small businesses with finance, such as the proposed Small Business Growth Fund which establishes a micro-finance company for small businesses.
The second priority is to get the flexi-wage scheme up and running by the end of the year. It’s essentially a wage subsidy programme that assists employers to hire and helps people with training or mentoring to gain the skills for a job.
The Government wants to support small businesses to adapt to COVID-19, to innovate, support jobs and ensure they keep going in any tough times to come.
The Government will also progress the promised new top personal tax rate of 39 per cent on income above $180,000. This change will affect 2 per cent of earners.
The extra revenue raised will help fund health and education services, control debt, and support the recovery plan.
This new top personal rate will apply from 1 April 2021.
We hope to legislate for it before the end of the year so Inland Revenue, payroll software providers and financial institutions will have enough time to adjust their systems and processes.
The new 39 per cent rate will need to be supported with integrity measures to address issues like people sheltering income in trusts to avoid the top tax rate.
I’m receiving advice from officials on the necessary integrity measures.
Improving our tax system – multinationals
Prior to the election, Finance Minister Grant Robertson announced the Government’s intention to address the tax rules that apply to multinationals.
The current international tax framework, which was first agreed to in the 1920s, has not kept up with globalisation and in particular the digitalisation of the economy. That is why there’s been significant international concern over the under-taxation of digital multinationals. In part, this is caused by the legal fiction that enables contracts to provide paid services in New Zealand to NZ businesses, who are in turn selling goods and services to NZ customers, to be categorised as not being a transaction in NZ. This is a legal fiction that is divorced from modern reality and needs to be fixed.
The result is that digital firms can do business in a country without being subject to tax there. Local New Zealand companies deserve a level-playing field when doing business. We don’t want to force NZ competitors into dodgier tax minimisation strategies to compete. We don’t want NZ media companies to collapse or be undermined in their ability to provide trusted news, sorting fact from fiction aka fake news, and avoid baseless conspiracy theories that wind up ill-informed citizens and undermine civil society, social cohesion and in the longer term prejudice the rights of those who rely on stability.
COVID-19 has further exacerbated this issue with digital multinationals playing an ever-increasing role in the economy. It’s a serious issue for countries to grapple with.
There are essentially two options for addressing this issue. The first is an OECD-led multilateral solution and the second is for countries to adopt their own digital services taxes (DSTs).
Our preference continues to be an OECD-led multilateral solution rather than a proliferation of DSTs. However, success at the OECD is not guaranteed and has been blocked for some time. We are seriously considering implementing a DST in the event the OECD project fails to reach agreement within a reasonable timeframe.
The proposed OECD-led solution is split into two “pillars”. Pillar One reallocates more taxing rights to market countries like New Zealand and Pillar Two is aimed at stopping the “race to the bottom” by imposing a global minimum tax.
We do have some concerns with the OECD policy, particularly around its complexity and potential compliance costs. We are working with the OECD to address these.
Despite this, the current policy design does broadly fit with New Zealand’s interests and we support its prompt development.
The OECD now plans to deliver a multilateral solution by mid-2021, after its original deadline was delayed partly by COVID-19 but mainly by disagreements between countries.
We hope this revised timeline will be met, but it is by no means certain and will require countries to accept greater compromise than has been seen so far.
The Work Programme
As the new Minister of Revenue, I have also inherited a Tax Policy Work Programme that I am keen to progress.
This includes two bills in the pipeline:
Firstly, the Taxation (Annual Rates for 2020-21, Feasibility Expenditure, and Remedial Matters) Bill is an omnibus bill that will set the annual rates of income tax for the 2020-21 tax year. It also has proposals aimed at improving the GST regime, KiwiSaver, Unclaimed Monies and social policy rules administered by Inland Revenue.
Secondly, the Child Support Amendment Bill amends the Child Support Act by simplifying penalty rules, introducing payment of financial support by compulsory deduction, imposing a time bar of four years, and inserting a definition of income.
I hope to progress these bills through their final stages in the first quarter of next year.
There are also a number of projects that officials have been consulting on and that you may have been involved in, such as:
- the tax treatment of donated trading stock, partly a Covid issue
- loss continuity, and
- a permanent loss carry back scheme.
Officials are advising me on these projects and I am interested to hear the feedback.
Last but not least, the final stage of IR’s business transformation programme is nearing completion. This will launch in March 2021 and deliver improvements to paid parental leave, child support, unclaimed monies, duties and foreign trusts activity.
IRs Business Transformation Programme has been very successful.
IR and CAANZ roles in the tax system
Before I finish, I want to touch briefly on Inland Revenue’s role, which I’m sure the Commissioner will talk more about in her speech to the conference tomorrow.
IR’s fundamental role remains the same – to make sure people receive and pay the right amounts and that everyone pays their fair share. And that means helping people get things right from the start, as well as reducing the opportunities for non-compliance.
Inland Revenue showed its ability to be agile during COVID-19 in the speed with which it set up the Small Businesses Cashflow (Loan) Scheme which quickly had money moving out the door to small businesses.
IR also supported your clients with instalment arrangements, remission of penalties and interest.
CAANZ and its members will continue to play a role in the pandemic response by providing advice to your clients. Government, IR and CAANZ all need to work together and tailor a response for businesses which are operating in a different environment than they’d planned for.
I’m confident that we will continue to work in a positive and constructive way.
One of the key assumptions in Inland Revenue’s multi-year business transformation programme was that IR would increasingly work with others to design and deliver services and this will continue.
Over the next twelve to eighteen months we’ll need a strong tax and social policy system to help support recovery.
2020 has been a big year and 2021 will be as well. More changes are coming and it’s by working together that we’ll make them successful.
Let’s all crack on with it so that our people can live long and prosper even in the midst of a global pandemic.