More work needed on the Taxation Principles Reporting Act

This article was current at the time of publication.

A tax principles reporting regime for New Zealand should be put off for a year, says CPA Australia.

The Tax Principles Reporting Act was passed by Parliament on 25 August 2023 and requires the Inland Revenue Department (IRD) to produce a first report before the end of 2023.

Neither opposition parties, National nor ACT, supported the legislation.

National argued it was an attempt to enshrine the Labour government’s own views on tax policy and make them binding on future governments. It has vowed to repeal the Act if it forms the next government.

CPA Australia argued in its submission to the Finance and Expenditure Select Committee considering the legislation that the start date should be delayed by a year “to provide sufficient time to consult on the initial approved measurements, design the work program and establish the required capabilities for delivery”.

The act was introduced by Revenue Minister David Parker and follows the publication in April of two official reports.

IRD’s High-wealth individuals research project examined how much tax is paid by 311 high net worth families in New Zealand, while the Treasury’s Tax and Transfer Progressivity project reported on effective average tax rates (EATRs), a measure of the net effect of taxes and transfers as a proportion of a taxpayer’s income.

The Act requires the Commissioner to report on “New Zealand’s current taxation settings in relation to the taxation principles in this Act, as measured using the approved taxation principles measurements”.

The approved principles are income distribution and income tax paid; distribution of exemptions from tax and of lower rates of taxation; perceptions of integrity of the tax system; and compliance with the law by taxpayers.

The Commissioner is required to deliver an interim report annually before the end of the calendar year “using the best information the Commissioner has on hand,” and a full report every three years.

In its submission to the select committee, CPA Australia said it supports transparent reporting and the publication of relevant and informative tax statistics.

Three areas of concern

However, it expressed three main areas of concern: the importance of the taxation principles; the challenges in developing measures of the tax system; and the capabilities required to undertake reporting.

While the taxation principles selected were well known and accepted among tax policy makers, other principles such as coherence, simplicity and sustainability deserved consideration.

The submission argues “the descriptions given of the principles can be read as confining or binding on this and future governments when developing tax policy”.

“The introduction of terms and concepts such as ‘unfairness’ or ‘at the very least’ require interpretation and an objective test, and the descriptions are more detailed than necessary. 

“We recommend further consultation on the principles and for consideration to be given to refining their descriptions,” notes the submission.

Elinor Kasapidis, CPA Australia Head of Policy and Advocacy, says the Australian experience suggests IRD will need considerable additional resources over time to develop a tax principles reporting regime.

“It will be a real challenge for IRD to produce these reports. They have to report to New Zealanders on how income tax is distributed, and these measures need to be well understood.”

Australia produces many tax statistics requiring substantial amounts of data and work, Kasapidis says.

“The amount of data collected through forms and returns in Australia is increasing, and that’s something New Zealand should be mindful of.”

Kasapidis says many submitters to the New Zealand legislation at the Bill stage were opposed to the creation of a “data collection machine”.

CPA Australia’s submission said IRD would need extra support and funding, with the required capabilities possibly including data analysts, revenue analysts, economists, risk managers, statisticians, experienced auditors and tax experts.

“We suggest reporting being confined to data currently collected by IRD, at least initially, with further consultation and expert input into the design of additional measures, or to identify opportunities to collect additional data without unreasonably increasing compliance and reporting costs for taxpayers.”

IRD should develop and maintain the required additional capability internally while engaging external experts to provide input and assurance over the process, CPA Australia’s submission says.