The purpose of this statement is to provide additional transparency around policy motivated 'expenditures' made through the tax system. Tax expenditures take the form of an exemption, allowance, preferential tax rate, deferral or offset that reduce a tax obligation to achieve a specific policy objective.
The purpose of this statement is to provide additional transparency around policy-motivated ‘expenditures' made through the tax system. Tax expenditures take the form of an exemption, allowance, preferential tax rate, deferral or offset that reduce a tax obligation to achieve a specific policy objective.
This voluntary disclosure improves our transparency arrangements by bringing New Zealand's financial reporting closer to OECD best practice standards. This statement is not intended to be a statement of policy effectiveness or desirability.
Changes from Previous Statements
The 2015 Tax Expenditure Statement is very similar to last year's statement. In this year's statement there is the addition of several income tax exemptions that are detailed in table 5.
What Is a Tax Expenditure?
Governments can spend in a variety of direct and indirect ways. International public sector accounting standards (IPSAS 23) divide spending into three different ca-tegories: direct spending; spending through the tax system; and tax expenditures.
Table 1: Classification of Crown spending under public sector accounting standards
|Direct spending||Traditional spending made as a direct transfer between the Crown and different entities or individuals.||Disclosed in the Crown Financial Statements and annual Budget.|
|Spending through the tax system||Hybrid transfers that can be taken as a cash payment or via a reduction in tax.||A predictable cash value allows these transfers to be formally appropriated and disclosed in the Crown Financial Statements and annual Budget.|
|Tax expenditures||Individual features of the tax system that reduce an entity's tax obligation in a way that is designed to give effect to policy other than to raise revenue in the most efficient and economically neutral way.||
Tax expenditures are defined in tax legislation, but have not previously been disclosed.
The 2010 statement was the first disclosure since 1984.
Tax systems differ from country to country. Thus, there is no current international consensus as to how tax expenditures should be categorised. Treasury released a discussion of how tax expenditure reporting could be categorised to meet New Zealand's objectives in Treasury Policy Perspectives Paper 09/01.
Some countries define tax expenditures indirectly relative to a normative benchmark. This approach allows countries to report a wider set of structural tax expenditures that are generally applicable. This document has focused, in the first instance, on a narrow subset of tax expenditures that bear a distinct fiscal cost and represent a clear policy-motivated exemption to current tax practice. A summary of the guiding criteria is included in figure 1.
No attempt has been made to identify a normative tax benchmark or to comprehensively analyse tax legislation.
Figure 1: Guiding criteria for inclusion in this disclosure document
- For example, Portfolio Investment Entities (PIEs) offer all tax payers the option of relatively ‘concessional’ tax treatment as a mechanism to encourage portfolio investment. While a non-revenue policy objective suggests that PIEs could be categorised as a tax expenditure, PIEs are excluded from the tax expenditure definition used in this document as PIEs are available to all taxpayers. A benchmark tax system would allow the Treasury to categorise structural features of the tax system such as PIEs, trusts, or progressive personal tax rates. A benchmark tax structure is useful where no clear exemption exists as it would define what constitutes the ‘standard’ tax treatment. For instance, is the ‘standard rate’ the company rate, PIE rate, trust rate, or one of the personal tax rates?
- The stated purpose of the Income Tax Act 2007 is to “define, and impose tax on, net income”. Tax expenditures are not motivated by a desire to raise revenue in the most efficient manner possible, but instead are significantly motivated by non-revenue policy objectives.
Current Tax Expenditures
The following sections list tax expenditures drawn from the Income Tax Act 2007, as at 1 April 2015. Current analysis suggests that the Goods and Services Tax Act 1985 does not contain any tax expenditures. Appropriated cash payments (spending) made through the tax system, eg, Working for Families tax credits, have also been included in the final part of the list. Cash payments made through the tax system do not formally meet a tax expenditure definition, but have been included for transparency purposes.
A small sub-section of tax expenditures with readily accessible data has been quantified (refer table 2). The government does not collect data on all tax expenditures as the compliance and administration costs of collecting additional data exceed the value that data might provide.
Table 2: Quantified Tax Expenditures and Spending through the Tax System
|Quantified tax expenditures||Value of expenditure 2012/13 (actual)||
Value of expenditure
2013/14 (estimated actual)
Value of expenditure
|Charitable or other public benefit gifts by a company: deduction||$20 million||$14 million||$14 million|
|Charitable or other public benefits: tax credit||$221 million||$236 million||$236 million|
|Independent earner tax credit||$217 million||$217 million||$217 million|
|Māori Authorities: donations||$0.7 million||$0.6 million||$0.6 million|
|Redundancy tax credit||$1 million||-||-|
Note: measured in March tax years
|Appropriated spending through the tax system||Value of expenditure 2012/13 (actual)||
Value of expenditure
2013/14 (estimated actual)
Value of expenditure
|Child tax credit||$2 million||$2 million||$1 million|
|Family tax credit||$2,060 million||$2,015 million||$1,897 million|
|In-work tax credit||$545 million||$533 million||$512 million|
|KiwiSaver tax credit||$723 million||$804 million||$882 million|
|Parental tax credit||$17 million||$18 million||$21 million|
|Minimum Family tax credit||$12 million||$14 million||$16 million|
Note: These credits are appropriated and are measured over the financial year.
- This includes tax expenditures yet to be enacted, but which have been agreed to by Cabinet, by 28 April 2015 and which will be in effect from 1 April 2015.
Tax Expenditures Categorisation
In the tables that follow, tax expenditures and appropriated spending are categorised by Type and Impact.
Notes on Categorisation
In this statement there are three types of tax expenditures:
1 Social: Tax expenditures that are introduced with the purpose of achieving certain social policy objectives. These can be either appropriated spending - such as the Working for Families tax credits - or income exemptions or deductions such as the Charities tax credit or the deduction for Māori Authority donations.
2 Business: Tax expenditures that are aimed at incentivising certain types of business or commercial activities in order to meet explicit or implicit economic policy objectives. Some examples include: income exemption for bodies promoting scientific or industrial research, or the deduction for petroleum mining expenditure.
3 Other: Tax expenditures that are not expressly introduced to achieve social or business economic policy objectives. An example is the tax exemption for the allowances of the Governor General.
Tax expenditures are also categorised by their impact. That is, whether their effect on the current tax base results from historic policy settings, and/or whether they are permanent, that is subject to no future reversal, or that they facilitate timing changes which reverse in the future. Detailed definitions of these impact categories are as follows:
1 Historic: Tax expenditures that are no longer available for new claims, but qualifying activity from the past can still affect tax revenues. Some examples include: accelerated depreciation and home ownership savings.
2 Permanent: Tax expenditures that reduce the overall amount of tax payable or increase entitlement to Crown expenditure. Some examples include: income exemption for Community Trusts and the Charitable or other public benefit tax credit.
3 Timing: Tax expenditures that achieve a tax deferral through allowing later recognition of income or earlier deductions that reverse over following years. An example is the film industry expenditure deduction.
Table 3: Tax Expenditures Included in the Income Tax Act 2007
Table 4: Approved Appropriated Spending Made through the Tax System
|Child tax credit||Section MZ 2||Families with a pre-existing entitlement dating from before 31 March 2006 are able to claim a tax credit for dependent children. Additional access to this tax credit is no longer available.||✓||✓||✓|
|Family tax credit||Section MD 3||Families are entitled to an income tested tax credit or cash payment for children aged 18 years or younger.||✓||✓|
|In-work tax credit||Section MD 10||Families with children 18 years or younger that work the required number of hours per week are entitled to an income tested in-work tax credit.||✓||✓|
|KiwiSaver tax credits||Section MK 1-8||The savings of participants in the KiwiSaver scheme are entitled to a tax credit.||✓||✓|
|Parental tax credit||Section MD 12||A tax credit may, under certain conditions, be paid to families with a newborn baby for the first 56 days (eight weeks) after the baby is born.||✓||✓|
|Minimum family tax credit||Section ME 1||A tax credit may be available to ensure that the annual income (after tax) of a family with dependent children 18 or younger does not fall below $22,776.||✓||✓|
Table 5: Revisions to Tax Expenditures since the 2014 Tax Expenditure Statement
Section CD 1D
Section CE 1E
Section CZ 29
|Added - these amendments are from the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014, which was enacted on 6 June 2014.|
|Plain clothes allowances||Section CW 17CC||Added - this amendment is from the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014, which was enacted on 6 June 2014.|
|Te Urewera Board||Section CW 40B and the Te Urewera Act 2014||Added - by the Te Urewera Act 2014 which was enacted on 27 July 2014.|