2016 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 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 2016 Tax Expenditure Statement is very similar to last year's statement. In this year's statement there is the addition of several income tax expenditures, and removal of one credit, that are detailed in table 5. For quantified expenditures, a greater number of previous years are reported in table 2, and a brief explanation of how they are calculated is provided in the Quantification Methods section on page 14.

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.

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.

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

Current Tax Expenditures#

The following sections list tax expenditures drawn from the Income Tax Act 2007, as at 1 April 2016. 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.

Note: measured in $000,000s over March tax years. Italicised values may be incomplete. See the appendix for further information on quantification methods.

Note: These credits are appropriated and are measured in $000,000s over financial years.

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

Table 5: Revisions to Tax Expenditures since the 2015 Tax Expenditure Statement

Quantification Methods#

This section provides further information on the methods used to obtain those expenditures listed in table 2.

Quantified Tax Expenditures#

Charitable or other public benefit gifts by a company: deduction

This item is sourced from the Income Tax return for companies (IR4). The values returned are the amount of donations made; the tax expenditure associated with these donations are the amount of donations multiplied by the company tax rate prevailing for the tax year in which the donations are returned.

Analysis of filing patterns in the previous two years suggests that claims for donation-related deductions are generally available by April the following year, and additional claims for a deduction are not large. Consequently, data for 2014/15 uses the claims information available at the end of April 2016.

The forecast for 2015/16 is, in the absence of better information, held at the same level as for 2014/15.

Charitable or other public benefits: tax credit

This item is sourced from the tax credit claim form (IR526) and from Employer Monthly Schedules for payroll giving.

Analysis of filing patterns for the IR526 return suggests that over 90 percent of claims for tax credits in the 2014/15 year will be received by April 2016. Consequently, for the estimated actual figure for 2014/15 we have assumed a small scale up on the credits received by April.

The forecast for 2015/16 is, in the absence of better information, held at the same level as the 2014/15 estimate.

The (small) payroll giving component of the donations reported in this expenditure are available within 20 days of the end of the month in which the donation was made, and actual data is used for the 2014/15 year. The forecast for 2015/16 is held at the same level as for 2014/15.

Independent earner tax credit

The Independent Earner Tax Credit (IETC) can be claimed at year end, or during the year through the PAYE system. For the year-end claims, the amount is compiled directly from IR3 tax returns or personal tax summaries. For the PAYE claims of people who do not square up at year end, the amount of IETC claimed is imputed monthly from the PAYE earnings of people who have selected ‘ME' tax codes for their PAYE. This monthly imputation annualises the earnings of that particular month, and imputes entitlement on the basis of these monthly earnings, not on the basis of the annual earnings.

The final step in quantification of IETC for any given return period is an estimate for late claims. Not all claims are made within a year of their entitlement, and back periods can continue to grow as late claims are made through the square-up process. From past experience, over $20 million of additional claims can be made in second and subsequent years.

Māori Authorities: donations

This item is sourced from the Income Tax return for Māori authorities (IR8). The values returned are the amount of donations made; the tax expenditure associated with these donations is the amount of donations multiplied by the Māori authority tax rate for the tax year in which the donations are returned.

Analysis of filing patterns in the previous two years suggests that claims for donation-related deductions are generally available by April the following year, and additional claims for a deduction are not large. Consequently, data for 2014/15 uses the claims information available at April 2016.

The 2015/16 year is estimated to be similar to 2013/14.

Appropriated spending through the tax system#

Child tax credit, Family tax credit, In-work tax credit, Parental tax credit, and Minimum Family tax credit

Historical values for these Working for Families tax credits are provided by Inland Revenue's Crown Accounting team, based on actual expenditure on these credits. These items are also formally forecast as part of the preparation of the Government's Budget process, and the values reported in the Tax Expenditure statement are taken from these forecasts.

KiwiSaver tax credit

The KiwiSaver tax credit reflects the combined expenditure on (historically) Kickstart, Member Tax Credit and interest payments made by Inland Revenue relating to the period when contributions to members' scheme providers are held by Inland Revenue.

Historical values for these tax credits are provided by Inland Revenue's Crown Accounting team, based on actual expenditure on these credits. This item is also formally forecast as part of the preparation of the Government's Budget process, and the values reported in the Tax Expenditure statement are taken from these forecasts.