2014 Tax Expenditure Statement

Introduction#

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 is the fifth successive release of tax expenditure data; 2010 was the first time New Zealand released tax expenditure data since 1984. This voluntary disclosure improves our transparency arrangements by bringing New Zealand's financial reporting closer to OECD best practise standards. As with other disclosures, additional tax expenditure transparency is not intended to be a statement of policy effectiveness or desirability.

Changes from Previous Statements#

The 2014 Tax Expenditure Statement is very similar to last year's statement. In this year's statement there is: the addition of a tax exemption and the removal of an old tax exemption (detailed on table 5); a reporting change; and some minor formatting changes.

To improve the accuracy and comparability of the statement this year's statement will report the expenditure from the last three years: actual expenditure from 2011/12; estimated expenditure from 2012/13; and forecasted expenditure for 2013/14. Past expenditure statements have only included expenditure from the last two years.

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 categories: direct spending; spending through the tax system; and tax expenditures. While 2010 was the first time since 1984 that the Treasury has released tax expenditure information, information on direct spending and spending through the tax system has been routinely released as part of our annual accountability data.

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[1]. 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[2] to current tax practice. A summary of the guiding criteria is included in figure 1.

The 2010 Tax Expenditure Statement was a first step towards improved transparency in this area and statements for 2011, 2012 and 2013 were also released; this document provides another update. No attempt has been made to identify a normative tax benchmark or to comprehensively analyse tax legislation. Work on identification is ongoing. For this reason, this list should not be taken as an exhaustive or complete list of all current tax expenditures.

Figure 1: Guiding criteria for inclusion in this disclosure document

Current Tax Expenditures#

The following sections list tax expenditures drawn from the Income Tax Act 2007. 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, e.g. 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 cost of collecting additional data is, in some instances, considered prohibitive. While work quantifying tax expenditures will continue, many tax expenditures may not be able to be quantified.

Note: measured in March tax years

Note: These credits are appropriated and are measured over the financial year.

Tax Expenditures Categorisation#

In the tables that follow, tax expenditures and appropriated spending, as at 1 April 2014 from the Income Tax Act 2007, 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 Maori 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 income 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 are subject to timing changes and they 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. Some examples include: the mineral mining expenditure deduction and 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

Table 5: Revisions to Tax Expenditures Since the 2013 Tax Expenditure Statement