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 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.
|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.
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
- 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. 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.
|Quantified tax expenditures||Value of expenditure
|Value of expenditure
2012/13 (estimated actual)
|Value of expenditure
|Charitable or other public benefit gifts by a company: deduction||$22 million||$25 million||$25 million|
|Charitable or other public benefits: tax credit||$126 million||$227 million||$235 million|
|Child taxpayer credit||$12 million||-||-|
|Housekeeping tax credit||$15 million||-||-|
|Independent earner tax credit||$212 million||$212 million||$212 million|
|Maori Authorities: donations||$0.4 million||$0.4 million||$0.4 million|
|Redundancy tax credit||$6 million||$1 million||-|
|Tax credit for transitional circumstances||$7 million||-||-|
Note: measured in March tax years
|Appropriated spending through the tax system||Value of expenditure
|Value of expenditure
2012/13 (estimated actual)
|Value of expenditure
|Child tax credit||$2 million||$2 million||$2 million|
|Family tax credit||$2,109 million||$2,060 million||$2,030 million|
|In-work tax credit||$567 million||$545 million||$523 million|
|KiwiSaver tax credit||$688 million||$723 million||$822 million|
|Parental tax credit||$18 million||$17 million||$17 million|
|Minimum Family tax credit||$11 million||$12 million||$14 million|
Note: These credits are appropriated and are measured over the financial year.
- A number of tax expenditures have been removed since 2011/12. See earlier Tax Expenditure Statement releases for further information.
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:
- 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.
- 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.
- 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:
- 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.
- 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.
- 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
|Accelerated depreciation||Sections DO 4-5, 12, DP 3, DZ 17-18, EE 31||The ability to depreciate capital items faster than their economic life reduces income by a greater amount in earlier years (deferring tax payments). This covers both primary sector amortisation and fixed asset depreciation.||✓||✓||✓|
|Allowances of the Governor-General||Section CW 16||Allowances and benefits received by the Governor-General and former Governor-Generals under the Governor-General Act 2010 are exempt from tax.||✓||✓|
|Bloodstock: accelerated deductions||Sections EC 38-48||Both the timing and rate of write downs are accelerated when compared with an economic approach.||✓||✓|
|Bodies promoting amateur games and sports: exempt income||Section CW 46||Income derived by a club, society or association is exempt income, providing it is established to promote an amateur game or sport and no funds are used for private pecuniary profit.||✓||✓|
|Bodies promoting scientific or industrial research: exempt income||Section CW 49||Income derived by a society or association established mainly to promote or encourage scientific or industrial research is exempt income, providing the society or association is approved by the Royal Society of New Zealand and no funds are used for private pecuniary profit.||✓||✓|
|Certain income derived by transitional residents: exempt income||Sections CW 27 and HR 8||New tax residents (both immigrants and returning New Zealanders) can gain a temporary tax exemption for up to four years on most foreign-sourced income.||✓||✓|
|Charitable or other public benefit gifts by a company: deduction||Section DB 41||A company is allowed a deduction for a charitable or other public benefit gift when made to a society, institution, association, organisation, trust, or fund described in section LD(3)(2) or listed in schedule 32 of the Income Tax Act 2007. This applies to cash donations only and is limited by net income.||✓||✓|
|Charitable or other public benefit gifts by an individual: tax credit||Subpart LD||An individual who makes a charitable or other public benefit gift is, under certain conditions, allowed a refundable tax credit. This applies to cash donations only and is limited by taxable income.||✓||✓|
|Charities: exempt income||Sections CW 41-43||Business, non-business and charitable bequests are exempt income for registered charitable entities. The exemption does not apply to business income to the extent that the charity carries out its charitable purposes outside New Zealand.||✓||✓|
|Community trusts: exempt income||Section CW 52||Income derived by the trustee of a community trust is exempt income.||✓||✓|
|Credits for savings in special home ownership accounts||Section LZ 9||An increase in savings in a special home ownership account can attract a credit.||✓||✓||✓|
|Farming business expenditure: accelerated deductions||Section DO 1-3, DO 10||Certain deductions granted for improvements and enhancements to land for farming can be expensed rather than treated as capital and amortised, e.g. fencing.||✓||✓||✓|
|Film industry expenditure: accelerated deductions||Section DS 1-4||Expenditure incurred acquiring film rights or film production expenditure can be expensed over a specified time frame.||✓||✓|
|Forestry encouragement grant: accelerated deductions||Section DP 5||Forestry expenditure incurred by a person who derives a forestry encouragement grant that is not grant related is immediately deductible.||✓||✓||✓|
|Forestry expenditure: accelerated deductions||Section DP 1||Expenditures associated with forestry (e.g. planting or tending costs) can be expensed rather than capitalised against harvest proceeds.||✓||✓|
|Friendly societies: exempt income||Section CW 44||Specified income derived by a friendly society is treated as exempt income.||✓||✓|
|Fringe benefit tax: partial exclusion for charities||Section CX 25||Generally fringe benefits provided to employees not involved in a charities' business are exempt FBT.||✓||✓|
|Funeral Trusts: exempt income||Section CW 45||Interest or a dividend derived by a trustee in a funeral trust is exempt income.||✓||✓|
|Herd improvement bodies: exempt income||Section CW 51||Income derived by a herd improvement association, or society established mainly to promote an improvement in New Zealand dairy cattle, is exempt income, providing no funds are used for private pecuniary profit.||✓||✓|
Income equalisation schemes: deduction
|Subpart EH||Persons working in forestry, fishing, or farming entities may reduce their taxable income in a year by depositing taxable income with Inland Revenue. The schemes allow taxable income to be transferred between years thereby smoothing taxable income.||✓||✓|
|Income for military or police service in operational area: exempt income||Section CW 23-24||Specified income derived by members of the New Zealand Defence Force (or the police) serving in an operational area can be treated as exempt income.||✓||✓|
|Income from conducting gaming-machine gambling: exempt income||Section CW 48||Gross gambling proceeds from gaming-machine gambling are exempt income if the person complies with the Gambling Act 2003. Note that turnover is separately taxed.||✓||✓|
|Independent earner: tax credit||Section LC 13||Individuals whose income is between $24,000 and $44,000, and who are not receiving certain forms of income, are entitled to a tax credit of $520. This credit abates once annual income rises above $44,000.||✓||✓|
|Interest on home vendor mortgages: tax credit||Sections LZ 6-8||A tax credit may be available for interest from a home vendor mortgage.||✓||✓||✓|
|Jurors' and witnesses' fees: exempt income||Section CW 26||Fees paid by the Crown to jurors and its witnesses, other than expert witnesses, are exempt income.||✓||✓|
Local and regional promotional bodies: exempt income
|Section CW 40||The income derived by a charitable association or society is exempt income, if it is primarily established for beautification purposes.||✓||✓|
|Maori Authorities: deduction||Section DV 12||A Māori authority is allowed a deduction for a donation that it makes to a Māori association as defined in the Māori Community Development Act 1962. It is also allowed a deduction for charitable or other public benefit gifts. This deduction applies to cash donations only and is limited by net income.||✓||✓|
|Non-resident oil rig and seismic vessel operator - tax exemption||Section CW 57||Income derived by non-resident operators of oil rigs and seismic vessels is exempt from taxation.||✓||✓|
|Payments of interest post-war credits: exempt income||Section CW 5||Interest derived by a person under section 2 of the Income Tax (Repayment of Post-War Credits) Act 1959 of the United Kingdom Parliament is exempt income.||✓||✓|
|Payments of interest on farm mortgages: exempt income||Section CW 6||50 percent of the interest that an individual derives from a mortgage securing a loan made by a seller of a farm is exempt income, if the Rural Banking and Finance Corporation of New Zealand approves the mortgage.||✓||✓|
|Petroleum mining expenditure: accelerated deduction||Subpart DT, sections EJ 12-20||Petroleum exploration expenditure is deductible as incurred.Development expenditure is written off over an accelerated seven-year period.||✓||✓|
|Scholarships and bursaries: exempt income||Section CW 36||Any scholarship or bursary payment for attendance at an educational institution is exempt income, except for a basic grant or an independent circumstances grant under the Education Act 1989.||✓||✓|
|TAB and racing clubs: exempt income||Section CW 47||Income derived by the New Zealand Racing Board, New Zealand Thoroughbred Racing, Harness Racing New Zealand and the New Zealand Greyhound Racing Association is exempt income. Note that betting turnover is separately taxed.||✓||✓|
|Veterinary services bodies: exempt income||Section CW 50||Income derived by a veterinary association, club or society established mainly to promote efficient veterinary services in New Zealand is exempt income, providing no funds are used for private pecuniary profit.||✓||✓|
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 2013 Tax Expenditure Statement
|Non-resident oil rig and seismic vessel operator - tax exemption||Section CW 57||Added - More analysis confirms this is a tax expenditure.|
|Mineral mining expenditure: accelerated deduction||Subpart DU||Removed - The mineral mining tax rules have been amended so that the taxation of mineral miners is more comparable to that of other taxpayers.|