THE EFFECTIVENESS OF TAX REVIEWS IN NEW ZEALAND: AN EVALUATION AND PROPOSAL FOR IMPROVEMENT The Centre for Commercial and Corporate Law Inc 2020 i The Effectiveness of Tax Reviews in New Zealand: An Evaluation and Proposal for Improvement Published in Christchurch by The Centre for Commercial & Corporate Law Inc School of Law, University of Canterbury Private Bag 4800, Christchurch, New Zealand ISBN 978-0-473-52769-3 This publication is copyright. Other than for the purposes of and on the conditions prescribed by the Copyright Act no part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means whether electronic, mechanical, microcopying, photocopying, recording or otherwise without the prior written permission of the copyright owner(s). The publisher, authors and editors expressly disclaim any and all liability to any person whether a purchaser of this publication or not in respect of anything or the consequences of anything done or omitted in reliance in whole or part. Published by the University of Canterbury ii Foreword FOREWORD This book proposes the establishment of a New Zealand Taxation Review Commission (NZTRC). It develops its argument for this in two ways. First, there is a survey of ad hoc tax reviews between 1922 and 2019. This survey ends with an analysis of the learnings that can be drawn from these reviews and draws together some thoughts on the characteristics of ‘best practice’ for review committees. Secondly, lessons are sought from a selection of permanent bodies that consider aspects of tax policy in a number of other countries. The final part of the book is the development of a plan for the Commission, concluding with draft legislation for its implementation. This book presents a survey of a 100 years of tax reviews in Aotearoa New Zealand. Coincidentally, those reviews are book-ended by two global pandemics (as a random aside, the 1922 Committee into Taxation made no reference to the global pandemic of 1918/19.) Over that century, taxation has been transformed. Some simplistic measures reveal a glimpse of this change. The Land and Income Tax 1916 contained 168 sections and was 42 pages long. The Income Tax Act 2007 is 2,400 pages long, counting the section numbers would numb the brain, and it is only one of the Revenue Acts. In 1919, the Government’s tax revenue (in descending order of magnitude) was from income tax (newly emerged as the principal source of revenue), customs duty, stamp and death duties, and land tax. In 2019, the sources of revenue (in same order) were income tax, goods and services tax, and excises. In 1918, about 36,000 taxpayers paid income tax in a total population of 1.15 million. In 2019, there were about 3.8 million income taxpayers in a population of just under 5 million. No doubt there are a number of other random measures that could be chosen to illustrate the change. All point in the same direction. Tax, its forms, and its collection and administration have changed immensely over the last century. In Sawyer’s view, few of the committees achieved much when we take a short-term perspective from the time of the report. But on a longer-term perspective, most have left a ‘significant’ but not usually ‘substantial’ impact. The one with the most lasting impact is probably the 1994 Organisational Review. Sawyer has mapped out a route through this century of transformation using 10 of these Reports. It is probably not a definitive list. For example, there was the 1952 Commission of Inquiry into the Taxation of Maori Authorities. There may be others. But the chosen 10 are the important markers. For scholars of legal history and, more particularly, tax history this survey provides material for further study. Linking these reports to broader questions of tax policy development and economic history would be an interesting project, or more likely several interesting projects. Beyond that potential use, this analysis gives a useful description of how tax policy has been developed over the years. Given the radical changes in taxation and tax policy over the past 100 years and Sawyer’s doubts about the iii The Effectiveness of Tax Reviews in New Zealand: An Evaluation and Proposal for Improvement lasting influence of them, the description ‘ad hoc’ seems most apt. That sets the scene for the proposals for a more coherent approach. Sawyer makes the case for a permanent Taxation Review Commission, or at least a semi-permanent one. He constructs this by drawing on the lessons from past reviews and here the principles of best practice are especially useful to his case. Secondly, he considers permanent bodies in a number of countries that perform some of the roles he envisages for the New Zealand Commission. He envisages that the mission and role of the Commission involves establishing ‘principles of taxation’ and studying, examining and if necessary recommending changes to New Zealand’s tax system. This model is fully developed, including an outline of draft legislation. No doubt further work would be required before legislation could be passed and, in this regard, much could probably be learned from the New Zealand Law Commission. Established in 1986, the Law Commission has provided independent reviews of many areas of law and made recommendations to its responsible Minister. Its practice of developing issues papers, undertaking extensive consultation and the use of expert reference groups has proved a helpful model. There are probably many insights that could be brought to bear on developing this tax specific body from New Zealand’s experience with a permanent body designed, as its purpose states, for the ‘systematic review, reform and development of the law in New Zealand’. The development of tax policy currently rests with Inland Revenue’s Policy and Strategy Group, working jointly with Treasury. Policy is developed using the Generic Tax Policy Process, a framework that has been used since 1995. This does involve extensive consultation but there are no independent voices in the process. The Policy and Strategy Group also drafts tax legislation. All other legislation in New Zealand is drafted by the Parliamentary Counsel Office, a separate statutory body established by the Legislation Act 2012 and under the control of the Attorney-General. Tax disputes are subject to a mandatory disputes resolution system administered by Inland Revenue and which is designed to have as many cases resolved internally as possible. This has probably been the most successful civil justice reform initiative in New Zealand’s history, if keeping cases out of tribunals and courts is the measure of success. There is a specialist tax tribunal, the Taxation Review Authority, but it hears a mere handful of cases a year, although a larger number do make their way to the High Court. In summary, Inland Revenue does policy development, writes the legislation, applies it and adjudicates on it when the taxpayer disagrees. Inland Revenue has a monopoly of most of the process. Further, New Zealand is relatively unusual internationally in not having a specific Taxpayer Bill of Rights, Taxpayer Charter, Tax Ombudsman or Tax Advocate. There are such instruments and/or persons in, for example, Australia, United States, Canada, South Africa, Mexico. The creation of a Tax Review Commission would bring some independent voices to the process. As Sawyer states, ‘[p]olitical considerations should not inform the work of the NZTRC, rather well-established good tax policy guidance should iv Foreword be the basis’. But as he also reminds us, it must be ‘remembered that Parliament ultimately determines the law’. That points of course to that basic constitutional principle in the New Zealand system. The Constitution Act 1986 s 22 states that it is not lawful for the Crown to levy tax ‘except by an Act of Parliament’. But as Sawyer goes on to note, the law is ‘in practice heavily influenced by the Executive.’ The development of good tax policy is essential for New Zealand’s economic well-being. More esoterically, but just as importantly, the development of it in a sound institutional manner is essential for New Zealand’s well-being. Those institutions need to be structurally robust, outwardly focussed on the breadth and diversity of interests in New Zealand society, permanent, professional and independent. Sawyer’s model of a NZTRC should be carefully considered. The existing system of policy development by a professional, independent civil service supplemented by occasional specialist committees has not been ineffective. But that does not mean that a re-think is not a worthwhile project. This book makes a valuable contribution to public policy in New Zealand. It is not just for ‘tax nerds’ (although there is plenty in it for them), but for all interested in New Zealand’s economic and social wellbeing and those concerned about robust policy development. His proposal warrants serious consideration. Let us hope it gets it. Shelley Griffiths Professor of Law University of Otago, Dunedin, New Zealand May 2020 v The Effectiveness of Tax Reviews in New Zealand: An Evaluation and Proposal for Improvement PREFACE “We do not learn from experience… we learn from reflecting on experience” John Dewey Tax committees are integral to a number of jurisdictions in terms of undertaking an extensive review of their tax system (whether in whole or in part), undertaking consultation with the private sector over proposed tax policy changes, and more generally, having an influence on the tax policy framework as a jurisdiction reviews the appropriateness of all or parts of its tax system. This book adopts an exploratory case study as it reviews and reflects on the role of ad hoc tax committees in New Zealand over the last 95 years from the early– 1920s to mid–2019.