Tax changes are unfair
Democracy is at risk with the proposal to grant the minister of revenue and the commissioner of inland revenue powers to circumvent tax laws for taxpayers. This proposal allows the commissioner, the minister and the governor-general to exempt taxpayers from statutorily imposed taxes, where the exemption is perceived to be consistent with the policy intent.
This proposal cuts deeply into the integrity of New Zealand’s tax system. The effect will be that some taxpayers have their tax liability reduced at the expense of others. And the ones most likely to benefit will be those with greater wealth.
New Zealand government is organised into three branches: Parliament makes laws; the judiciary interprets and enforces laws; and the executive administers laws. Separation of the functions of government is essential for the democratic integrity of our country.
The executive branch of government responsible for collecting taxes is the Inland Revenue Department, managed by the commissioner of inland revenue who is, effectively, the chief executive. Inland Revenue is there to collect taxes according to the laws made by Parliament.
Occasionally, the law delegates making policy or regulation to the executive a role – but this is within a framework. This proposal extends to the commissioner a power to exempt the application of a law made by Parliament. Why is this a concern? Surely not many taxpayers will object to being alleviated of this burden.
However, often forgotten is that the revenue needs of government are reasonably fixed. Alleviating the tax burden of one taxpayer means the other taxpayers need to pick up the shortfall. While, on a theoretical basis, the concession may be available to all taxpayers, the technical nature of taxation and the cost of taxation advice typically means access to the right advice and knowledge is limited to those who can pay for it. In other words, this will be a concession available to those who can pay the advisers with the best resources available.
For example, Billie Smith arrives in New Zealand in 2012 to live permanently. Billie has emigrated from Hong Kong, the base for her global business. Billie has foreign investments in multiple foreign entities valued at $100 million. Through a failure to comply with a legislative requirement, Billie finds herself with a higher tax burden in New Zealand than she would have if her advisers had structured her affairs in a certain way. Billie’s advisers realise their mistake and, after discussions with the commissioner or the minister of revenue, it is resolved that it was a simple error and we don’t want to annoy Billie as she is a high net worth individual – someone New Zealand wants to attract.
Under the proposed extension to the commissioner’s power, she doesn’t have to apply the law strictly due to the perceived unfairness of the outcome. The commissioner goes through the public consultation process, no-one shows any interest whatsoever because the issue is technical, and the taxpayer is relieved of the tax.
Meanwhile, multiple other taxpayers in the same position have complied with their tax obligations and paid the taxes owing. Compliant taxpayers may sue their tax advisers for negligence to recoup some of their costs.
This concession will disadvantage the compliant taxpayer over the non-compliant taxpayer, undermining the voluntary compliance approach. It favours those who have expensive tax advisers with resource to lobby for the concession to be used in their client’s favour.
It also circumvents the processes required for a change in law, including public consultation, Finance and Expenditure Select Committee scrutiny, independent advice and Parliamentary scrutiny. It extends to an unelected member of the executive, a right to circumvent law made by the elected members. This practice should not be legitimised.
Whatever the answer really is, I think we can be sure that it will have something to do with love.