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Tax Working Group recommends changes to tax system

20 January 2010

In its report released today, the Tax Working Group (TWG) recommends that the Government considers significant changes to make the tax system fairer and more effective.

“Put simply, the tax system is broken and needs to be fixed,” Professor Bob Buckle, the Chair of the Group, said. “We’ve suggested a number of ways this can be done.

 “We think there is a once-in a generation chance for New Zealand to get a world-class tax system , one that’s set up to meet the challenges of the 21st century.”

The TWG report – A Tax System for New Zealand’s Future – says that retaining the current tax system is not an option.

“The Group’s strong view is that reform is necessary if New Zealand is to have a fair tax system that minimises the costs of raising taxes, reduces barriers to productivity and growth and positions it well for future challenges,” Professor Buckle said.

The report identifies three critical concerns with the present system:

  • Its structure is inappropriate: New Zealand relies heavily on the taxes most harmful to growth, particularly corporate and personal income taxes; there is a major hole in the tax base concerning the taxation of capital, and Working for Families creates very high effective marginal tax rates.
  • It lacks coherence, integrity and fairness: differences in tax rates across entities provide opportunities to exploit the system, and the income tax burden is disproportionately borne by PAYE taxpayers since many with wealth can restructure their affairs to shelter income from taxes, or to enable people to receive social support.
  • There are significant risks to its sustainability: international competition for capital and labour, especially from Australia, affect what we can do with tax rates; and demographic change will also affect the tax system. Also, if people think that the system is unfair, compliance will be affected. 

Professor Buckle said that the Group recommended improvements involving a combination of changes to the tax bases (what is taxed) and tax mix (how much revenue each base provides), to tax rates, and by improving some of the supporting tax rules.  The problems with the current system are such that a comprehensive package of reforms is required.  Some reform options will result in more revenue being collected, others less. Overall, the result is likely to be revenue neutral, but the fairness, integrity and growth orientation of the system enhanced. 

The key recommendations are:

  • The company, top personal and trust tax rates should be aligned to improve integrity. At the very least the trustee rate, top personal tax rate and rates for savings vehicles need to be aligned
  • The company tax rate needs to be competitive with other country’s rates, particularly that in Australia. Balancing this factor against the integrity benefits of a fully aligned system will guide choices between an aligned and non-aligned system.
  • The top personal tax rates should be reduced as part of an alignment strategy and to help growth. A reduction in personal tax rates across-the-board could be achieved as part of a package to compensate for any increase in GST.
  • Increasing GST to 15% would have merit on efficiency grounds, but any increase in the GST rate would require compensation to those on lower incomes, and the current GST base should be maintained.
  • Base-broadening is required to address some existing biases, to improve the system’s efficiency and sustainability, and is necessary to maintain revenue levels if corporate and personal tax rates are reduced.
  1. The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a ‘risk-free rate of return’ method.
  2. Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.
  3. The Group also suggests a number of targeted options for base-broadening should be considered for introduction relatively quickly. These include: removing the 20% depreciation loading on plant and equipment; removing tax depreciation on buildings if evidence shows they do not depreciate in value and; changing the thin capitalisation rules for foreign-owned companies.
  • A comprehensive review of welfare policy and how it interacts with the tax system.
  • Institutional arrangements to maintain the overall coherence and integrity of the tax system.

“An essential element of reform is choosing a taxation system that reduces uncertainty over future tax rates and tax bases and minimises vulnerability to interest group pressure and political temptation to change, as many of the current problems are to do with the overall coherence of the system,” Professor Buckle said.

The Tax Working Group (TWG) was established by Victoria University’s Centre for Accounting Governance and Taxation Research, in conjunction with the Treasury and Inland Revenue, in May 2009. While an independent Group, it was formed with the support of the Minister of Finance, Hon Bill English, and the Minister of Revenue, Hon Peter Dunne.

At its first meeting the Group agreed that it would keep six principles in mind as it looked at the future tax system: fairness; the impact on economic growth; system coherence; the integrity of the system; simplicity of compliance and administration; and fiscal cost.

The Tax Working Group was:

Bob Buckle, Victoria University of Wellington (Group Chair)
Rob Cameron, Cameron Partners
Paul Dunne, KPMG
Arthur Grimes, Motu Economic and Public Policy Research
Rob McLeod, Ernst & Young
Gareth Morgan, Gareth Morgan Investments Limited
Mike Shaw, Deloitte
Geof Nightingale, PricewaterhouseCoopers
Casey Plunket, Chapman Tripp
John Prebble, Victoria University of Wellington
John Shewan, PricewaterhouseCoopers
Mark Weldon, NZX Limited
David White, Victoria University of Wellington

Summaries of the Group’s deliberations and background papers have been posted on the Tax Working Group website. The full TWG report is also available on the website.

Opinion Piece: Why the tax system needs to be reviewed

16 January 2010

Professor Bob Buckle, Dean and Pro Vice-Chancellor of the Faculty of Commerce and Administration and Chair of the Tax Working Group recently summarised concerns about the New Zealand Tax System in the Dominion Post newspaper. Read more on stuff.co.nz

Richard Carey receives Honorary Doctorate

December 2009

Richard Carey, an international civil servant has been conferred an honorary degree from Victoria University of Wellington.

Richard Carey has worked for the Organisation for Economic Cooperation and Development (OECD) for nearly 30 years, and since March 2007 has been Director of the OECD’s Development Co-operation Directorate.

Mr Carey has played a leading role in the major initiatives of the last three decades of the OECD’s Development Assistance Committee, which serves to produce better understanding and cooperation between the rich and poor countries of the world.

Richard has been a major influence in shaping the OECD’s contribution to thinking and practice in the fields of aid and development policies and the evolution of north-south economic relations over this period,” says Professor Pat Walsh, Vice-Chancellor of Victoria University.

With a passionate commitment to effective international co-operation to address the fundamental problems of development and poverty, he is one of Victoria University's most distinguished graduates, having graduated with a BCAHons in 1967.

Richard Carey received the honorary degree of Doctor of Commerce at Victoria University’s, Faculty of Commerce and Administration, December graduation in 2009.

Tax Working Group praised for open policy process

December 2009

The report of the Victoria University of Wellington Tax Working Group will be considered by the Government as it puts together its 2010 Budget.

Finance Minister Bill English, who opened the Tax Working Group’s (TWG) one-day conference at Rutherford House on 1 December, said the TWG’s process had worked very well in raising issues and generating debate, and that a tax package would be part of next year’s Budget.

Both Mr English, and Revenue Minister Peter Dunne, who closed the conference, said that the TWG process represented a new and better way of exploring public policy.

"For virtually the first time, we have been able to have a thorough, open and transparent debate about tax policies, without the process being subject to political hijacking or kneecapping,” Mr Dunne said.

"That has been extremely positive, and a tribute to the way the independent Working Group has operated, and I will be keen to explore separately with Victoria University how we can make ongoing use of this approach in the future."

Nearly 200 people attended the TWG conference, which mirrored the approach the Group had taken in its sessions of considering various aspects of the tax system against six key principles: fairness; the impact on economic growth; system coherence; the integrity of the system; simplicity of compliance and administration; and fiscal cost.

Every member of the TWG was involved in the conference and presented on one of five broad areas – problems with the current system; income tax and transfers and GST; base-broadening, including capital gains and land taxes; company taxes; and scenarios for reform.

Professor Bob Buckle, Victoria University Pro Vice-Chancellor and Chairman of the Tax Working Group, said the conference was a great success.

“It showed this sort of open policy process and the university partnering with government departments and the private sector can really work,” Professor Buckle said.

“And it showed that there is real public interest in tax policy. The Group’s discussions, and the conference, were about the real-world effects of the tax system—its impact on people and firms, and the role of tax in improving peoples’ lives and the country’s economic performance.”

Professor Buckle said that the TWG believed New Zealand has a once-in-a-generation chance to develop a world-class tax system. It will be holding one more session to finalise its thinking and will release its report in January.

Mayor receives special MBA alumni award

30 November 2009

Mayor Kerry Prendergast was honoured with a special award at Victoria University's MBA annual dinner on Saturday 28 November.

Mayor Prendergast, who graduated with an MBA from Victoria in May 2004, received the highest rankings by Victoria's current MBA students out of a list of six high profile Victoria MBA alumni. The candidates were ranked on their skills in innovation, integration and leadership, the principles of the Victoria MBA's mission.

Mayor Prendergast's citation read by Dr Paul McDonald from Victoria Management School, who was one of Mayor Prendergast's lecturers referred to her strong work ethic and commitment to service, and her ability to function effectively within a world of complexity and diversity.

Her leadership skills and support of innovation were also commended.  She is accessible, democratic and personable while keeping her vision for Wellington as a creative capital firmly in focus, said Dr McDonald.

The Victoria MBA builds on almost three decades of quality and tradition, says MBA Director Dr Arun Elias.

We believe that innovative leadership is essential in the 21st century business environment, and awarding excellence in this area sends a positive message to our students about the desirable qualities of leadership.

We have a number of highly successful graduates, but Kerry was judged as the individual who most embodies the values, aspirations and beliefs that define our Victoria MBA.

The winner was selected after Dr Elias shortlisted six candidates for the award, following consultation with three previous Victoria MBA Directors Professor Lawrie Corbett, Dr David Stewart and Dr Paul McDonald. Current MBA students then ranked the candidates.

The award was granted as part of the Victoria MBA's 25th anniversary celebrations. Over 25 years Victoria has produced around 1000 graduates, many of whom populate the executive ranks of business as well as public sector enterprise, in New Zealand and abroad.

Read more about the MBA programme on the Victoria Management School web pages.

Ako Aotearoa grant awarded

November 2009

Congratulations to Simon Park and Janet Toland from the School of Information Management (SIM) who have won a $5000 award from Ako Aotearoa. The grant is for the development of a multimedia presentation to share SIM's good teaching and learning practice with other tertiary institutions. Entitled Ignite Potential - Motivating tutors to light up the learning environment, the presentation will explain a system for building a team of approachable tutors that Simon has been applying and developing for the last three and a half years.

Changes to the Bachelor of Commerce and Administration (BCA) at Victoria

From 2009, the Bachelor of Commerce and Administration will be changing in a number of ways. 

Core change

The core is being increased from three to seven courses.  ACCY 111 and ECON 130 will remain in the core, FCOM 110 will be replaced by a new course FCOM 111 (Government, Law and Business), and the following courses will be added to the core:

  • INFO 101: Foundations of Information Systems
  • MARK 101: Principles of Marketing
  • MGMT 101: Introduction to Management
  • QUAN 102: Statistics for Business
Note:
  1. As is currently the case, students with high achievement in NCEA Level 3 Economics may be permitted to replace ECON 130 with ECON 140.
  2. It will be possible to replace FCOM 111 with COML 203 and any one of PUBL 113/201/202.
  3. This change will not affect current students, except that a student who has not yet passed FCOM 110 under the current statute will not be able to do that course since it will no longer be offered.  Such students will be able to replace FCOM 110 with the pair of courses FCOM 111 and MGMT 101.  Alternatively, exemptions from FCOM 110 may be allowed where a student has passed a wide enough range of business-related courses. Please consult the Associate Dean (Students).
Breadth requirement

Students will no longer be required to include courses in two different subjects at 300-level.  (Current students will still have to meet this requirement unless they switch to the new statute, which means completing the seven course core.)

Points changes

The points values of 100-level BCA courses will be reduced from 18 to 15.  That does not mean that current students will lose points for courses that they have passed (or will pass in the remainder of 2008).  However, it does mean that current students who do a core course such as ACCY 111 or ECON 130, or any 100-level BCA elective, will only receive 15 points for it from 2009 on.

Note:
  1. Students who end up with 355-359 points because of the reduction in points values may be permitted to complete the degree (ask the Associate Dean, Students).
  2. 100-level TOUR courses are being increased to 20 points, while many 100-level Science courses are being reduced to 15 points.
  3. 200 and 300-level BCA courses will remain at 22 and 24 points respectively in 2009, but will be changing to 15 points from 2010.

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