Speech – New Zealand Government
Hon Peter Dunne Minister of Revenue Speech Getting Governance and Accountability Right in the Not-for-Profit Sector Conference Rutherford House, Victoria University 1.30pm, Friday 23 November 2012 I am delighted to have been invited to address you …
Hon Peter Dunne
Minister of Revenue
Getting Governance and Accountability Right in the Not-for-Profit Sector Conference
Rutherford House, Victoria University
1.30pm, Friday 23 November 2012
I am delighted to have been invited to address you on a sector that plays an increasingly significant role in our society and which is of particular importance to me.
The success of the not for profit sector is something that I personally am deeply interested in, so when I began to think about my remarks today I focused on two questions.
First, why exactly should the Government, through the tax system provide support for the not-for-profit sector?
And, second, how can we be confident that the support mechanisms devised are the best ones?
The work that the not for profit sector does goes beyond the immediate recipients of your services so the Government has a direct interest in the sector being as productive as possible.
At the outset, therefore, I would like to thank you for the very good work you do for your communities and for New Zealand.
In so many areas, your input is increasingly critical to the development and delivery of quality services, so much so that the sector has become a vital component of our whole approach to the delivery of social services.
To answer my two primary questions, I will talk today about how tax policy is developed and how the not-for-profit sector can engage in and influence that policy formulation.
And I will also discuss current tax policy work and work coming up in the future, as it relates to the sector.
But first I want to talk about the support that the Government already provides through the tax system.
In recent times we have seen a steady increase in demand for your services to the community and you have always responded.
In my view, that demand and respect for the services you provide will only but grow in the future.
It arises from both a philosophical recognition of the power of community based agencies in community development, and the reality that in so many areas not for profits are as well, if not better, placed than official agencies to provide a quality, responsive and professional service.
In turn, that is why successive Governments have sought to respond with measures that have been beneficial to the sector.
Support through the tax system
One key way that Government has always supported the sector through the tax system is of course, financially, with:
• Income tax exemptions
• FBT exemptions
• And, of course tax incentives for charitable giving
These forms of Government support have been based on the concept that the services that not-for-profit organisations provide are complementary to the programmes that the Government provides as part of its social objectives, and assist in furthering those objectives.
Therefore, aside from the obvious benefit and encouragement to individual donors subsidising not-for-profit organisations through the tax exemption ensures that those members of society who do not donate to charitable organisations but who nevertheless benefit indirectly from them, contribute through their general tax payments.
In the past seven years, during my stewardship of the Revenue portfolio it has been of tremendous satisfaction to me to see a number of tax initiatives designed, developed and delivered which I believe are of lasting value to the sector.
In that time, under both governments, I have been able to deliver key elements of UnitedFuture’s own policy to promote the not for profit sector and boost a culture of giving in our society, and I am very proud of that.
Recent policy reforms
There have also been a number of major tax policy initiatives introduced in the last few years to support the activities of charities and other non-profit organisations, after the introduction of the Charities Act 2005.
As you know, the Charities Act established the Charities Commission (now the Department of Internal Affairs – Charities) and a process of registration and monitoring of charities in New Zealand from 1 February 2007.
It also introduced the requirement that a charity had to be registered with DIA-Charities in order to be eligible for the charities-related tax exemptions.
Since the introduction of the Charities Act, providing a seamless service for registered charities has been a key goal for both Inland Revenue and DIA-Charities.
Joint initiatives have been or are being established in the areas of relationship management, information sharing, communications and monitoring and compliance.
While I believe this arrangement is working well, there are some legislative improvements that can be made to help streamline the administration of charities further – such as clarifying the tax consequences for charities that have deregistered – but I will say about this later.
Obviously when you bring in such a huge reform like Charities registration – there are likely teething problems.
So to help charitable organisations transition to the Charities Register we introduced:
• transitional tax rules for charities who had not completed the registration process before 1 July 2008; and
• an explicit tax exemption for overseas recognised charities from 1 July 2008;
These changes allowed organisations more time to register with the Charities body and also helped clarify their tax obligations.
And, in 2009 because of the increasingly global nature of charitable work, the sector asked for information on the criteria and process for becoming a recognised overseas donee organisation.
A set of guidelines was duly developed, to help charitable organisations determine whether they meet the criteria to be added to Schedule 32 of the Income Tax Act 2007.
Inclusion on Schedule 32 is a carefully considered process which involves amending the Income Tax Act, so the guidelines give organisations information about the kind of questions that are asked when they seek overseas donee status, and to promote self-evaluation before they ask the Government to amend the law on their behalf.
Other recent reforms also helped to encourage a “culture of charitable giving in New Zealand” through:
• lifting of the caps on the tax incentives for charitable giving in 2009;
• the introduction of Payroll giving from 1 January 2010; and
• clarifying the tax rules for reimbursement payments and honoraria from 1 April 2009.
And in 2011, we removed gift duty on gifts made to a charity or donee organisation.
These latter measures were all specific parts of the UnitedFuture policy programme for the sector, and I was delighted to be able to steer them through to successful implementation.
Success of these measures
It is easy of course, to feel self-satisfied about putting such measures in place, but one has to reflect on their effectiveness.
Since the removal of the capped amount in 2009, reported donations increased to $578.7 million in 2009 and $590.8 million in 2010.
Since January 2010, payroll giving uptake has been steady, and is comparable to uptake in similar jurisdictions overseas.
Payroll giving donations have now reached $8.1 million.
Some 1955 employers have offered payroll giving to their employees and around 12,500 employees have chosen to give through this system.
It is a fast, convenient and above all, flexible way to give, allowing one-off donations.
Where Payroll Giving really came into its own was immediately following the earthquakes in Canterbury.
And just on the earthquake, in 2011, over 2000 donors responded by giving their tax credits to the earthquake appeal, raising over $400,000 through this means alone.
This exercise was repeated this year.
I find it heartening that far from forgetting about Christchurch, New Zealanders are still redirecting their tax credits to the appeal.
In the year to date, a further $300,000 has been donated.
This is impressive and it was all made possible by the fact that tax incentives for charitable giving are in place.
So have they been successful?
Well perhaps I might now turn to my second question.
How can we be confident that the support initiatives that Government develops will actually be of use to the sector?
Tax policy process
The simple answer is that we have a framework for policy development, which ensures that policies are sound, workable and fit for purpose.
It is a well-established, proven process for tax policy development known as the Generic Tax Policy Process (or GTPP) and this is simply an acknowledgement that Government cannot develop tax policy in isolation.
In assessing the merits of individual policy options relevant to the not-for-profit sector, consideration is given to the effect they would have on the growth of the charitable and non-profit sector in New Zealand and the resulting benefits to New Zealand.
The policy options should also be fair.
Obviously, a policy that provides financial support represents a cost to the taxpayer and Government.
The costs of different policy measures that need to be considered include:
the cost to businesses, community and voluntary organisations and individuals of the costs of complying with the tax rules;
administrative costs, that is, the cost to the Government of administering the tax rules, and
what can be termed deadweight costs – the costs that arise from the effects of the tax system on decisions to produce, consume, work, save and invest.
Consideration of these benefits and costs will inevitably lead to policy trade-offs being made.
These are increasingly important considerations.
In times of economic adversity, it is necessary to ensure careful fiscal management and also to ensure that Government revenue is protected because certain Government services and functions must continue – preferably without having to borrow to fund them.
Maintaining a stable revenue stream is absolutely critical in retaining international confidence.
But maintaining such a stream is not simply a matter of gathering as much tax as possible – the focus has been on making changes at the margin within our current framework to make it fairer and more efficient.
These themes have been an ongoing feature of our Budgets since the GFC began, if not before, and were well illustrated in this year’s Budget handed down in May.
That Budget included measures that through a combination of better enforcement and collection will collect over a billion dollars in additional revenue over the next five years, without one tax rate being raised.
We are aiming for the best possible tax system designed by the best possible policy and supported by the best possible tax administration.
A tax policy proposal is only good if it is workable and reflects the will of the people and is finely focused on its objectives.
I therefore urge you to take advantage of opportunities to comment where tax policy proposals affect your work.
To be good policy, it must be practical and fit for purpose and the best way to achieve that is through proper public consultation, a key feature of the GTPP.
I would like to give you two examples of GTPP as it is intended to work.
In October 2006, the discussion document, Tax incentives for giving to charities and other non-profit organisations was released proposing a range of options.
This followed months of engagement between Inland Revenue and representatives from the community and voluntary sector to explore the tax policy implications.
The representative group was particularly interested in being used as a reference group to test policy ideas and to assist in developing a consultation strategy for a forthcoming discussion document and encourage the sector to provide feedback.
The agreed strategy included a series of information workshops in Wellington, Christchurch, Dunedin, Hamilton and Auckland and were well attended.
These workshops allowed participants to thoroughly examine the now-released discussion document, but also many participants learnt about the existing tax rules.
There was huge support for the initiatives proposed in the discussion document.
Feedback from consultation was that the proposals relating to increasing the tax relief on charitable donations did not go far enough.
Government listened to the feedback.
For example, feedback strongly supported removing the current caps altogether as this would provide a stronger incentive for people to give more and would align the New Zealand tax treatment of donations with other OECD jurisdictions.
The Government agreed, and the current limits were removed with effect from 1 April 2008.
The feedback received, helped the Government to prioritise which options should go forward; which should be explored further; and which may not work in a New Zealand context.
This led to the tax changes outlined above, as well as two further discussion papers containing proposals for:
• clarifying and simplifying the tax law on how reimbursements and honoraria paid to volunteers in the non-profit sector are to be treated
• exploring whether New Zealand should introduce a pre-tax payroll giving scheme.
Proposals in both documents received overwhelming support from a wide range of people and organisations, and were seen as a positive step towards the development of and support for the charitable and voluntary sectors in New Zealand.
Both initiatives were included in the Taxation (International Taxation, Life Insurance, and Remedial Matters) Bill, which was introduced into the House in July 2008.
All in all, a very positive example of Government working closely with the sector.
The key here was the very high level of engagement.
Of course it helped that the objective of the tax policy proposals was to the advantage of the not-for-profit sector.
My other example is slightly less so.
Earlier this year, Inland Revenue released an officials’ issues paper, Recognising salary trade-offs as income.
A proposal in that paper suggested that currently untaxed non-cash benefits provided by an employer to an employee, such as an on-premises car park or benefits provided to an employee of a charitable organisation, should be taxable.
The paper, I should point out was not directed solely at charities: a range of different employers and employees were potentially affected.
In October, following consideration of submissions on the proposals, I released a media statement announcing that Cabinet had decided that a wider set of car parks provided to employees are to be taxed, through the Fringe Benefit Tax rules.
Crucially for charitable organisations, after weighing up all considerations, Cabinet decided that tax should be applied fairly, but without imposing undue compliance costs.
And this meant that as far as charitable organisations were concerned, there would be very limited change:
• the FBT exemption for cars would not change;
• the car park changes will not apply to charitable organisations unless of course FBT currently applies, such as when benefits are provided to employees of businesses run by charitable organisations and those businesses are outside of their charitable purpose;
• there would be clarification that the charitable organisations’ FBT exemption will not generally apply to vouchers, such as grocery or petrol vouchers.
• employees of charitable organisations will not, however, be exempt from the changes proposed for all employees in relation to social assistance. Explicit salary trade-offs involving vehicles and car parks, as well as vouchers, will be included in the definition of income used when calculating social assistance entitlements and obligations.
This is a good demonstration of why we use GTPP for policy development.
The initial wider proposals were good ones from a purely policy point of view, reflecting the Government’s objectives for the tax system.
It is right that everyone pays their fair share of tax.
It is right that people on equivalent incomes pay a similar amount of tax and receive a similar amount of social assistance, whether they receive their remuneration in cash or in non-cash benefits.
However this needs to be balanced against other considerations, such as the practical costs of doing so, and public feedback is vital in drawing out and gauging the merits of concerns with proposals.
And the Government listened to that feedback, and I want to acknowledge particularly the quality and depth of the submissions we received from the charitable sector on this point.
They were extremely influential.
The message for you is that the Government cannot develop tax policy in isolation and I urge you to take every opportunity that arises to comment on upcoming tax policy issues affecting the sector.
The reforms I have outlined to you here today have been part of major Government-wide reforms.
Now, after five years of major changes we want those changes bedded in and are not looking to make further large scale tax changes in the future.
Upcoming policy work
Work will instead focus on a package of technical measures aimed at improving the overall integrity and coherence of the charitable income tax exemption and the tax incentives for charitable donations.
These measures would include:
• Clarifying the tax consequences where a charity has been deregistered. Charities that have been deregistered or declined by the DIA-charities face tax consequences that can be unclear or complex; and
• Resolving a number of technical problems relating to donee organisation requirements. The donee status requirements are different from those for charitable entities, and this has given rise to confusion and compliance costs for charities and donors; 
• Dealing with transactions where there has not been a “true” gift. We have seen some schemes that allow charitable donations tax incentives to be claimed in circumstances when there has not been a “true” gift.
• Improving the Schedule 32 process for approving overseas-focussed charities. Donee organisations that send funds overseas or that carry out charitable purposes overseas pose specific risks. There is increased opportunity for serious wrongdoing through fraud and money laundering and it is more difficult to verify whether the charities are actually carrying out charitable purposes overseas.
• Clarifying the tax calculation for charities that apply their business income overseas.
The intention is to ensure the charitable income tax exemption and incentives for charitable donations are appropriately targeted and that policy intentions are being met.
The proposed timeline for this work could see policy solutions available for inclusion in a tax bill in 2013.
Inland Revenue and the Treasury will lead this work.
While work in the pipeline may not be on the same scale as we have seen in the past, it is still in the interests of everyone in the sector to acquaint themselves with any proposals, consider the implications and if necessary, make submissions.
With the Generic Tax Policy Process, you have a voice and I, as Minister of Revenue, am keen that that voice is heard.
By doing so you are contributing to the development of sound, practical tax policies affecting this very important sector of New Zealand’s society.
Charities Act review
A piece of work that will not go ahead at this stage as I am sure you are aware, is the review of the Charities Act as announced last week by the Hon Jo Goodhew, Minister for the Community and Voluntary Sector.
As the Minister said, the decision to not proceed with the review was not one that was taken lightly.
It reflects the competing considerations that Government has to weigh up which I have touched on.
I am aware this has been a disappointment for the sector, but I am afraid that in our current fiscal environment, such a review is not justifiable at this stage.
Government does value the contribution that the not-for-profit sector makes.
The important thing, I think, is to focus on ensuring that reforms recently introduced by the Government, including the regulatory regime for charities work as intended.
Over the last few years the Government has demonstrated the value it places on the sector by introducing tax incentives to provide financial support for the sector and simplifying policies to facilitate charitable giving.
In devising tax policy, the Government is keen to ensure continued support for the sector, but must balance that with the various considerations that come into play.
That intention to provide support still remains, I assure you, but tax policy work in the foreseeable future is more modest in its scale compared to what has gone before.
To ensure that tax policies continue to support the sector, the Government relies on the sector to express its views on tax proposals.
For my part, I am keen to continue the positive working relationship we have established over the years to update and modernise our tax system, to make sure it reflects better the needs of our increasingly dynamic not for profit sector.
 Donee organisations that have overseas charitable purposes must be listed on Schedule 32 of the Income Tax Act 2007 in order for their donors to be eligible for the tax incentives for charitable giving on the donations they make to these organisations.