The false economy of working quickly

We live in an ever fast-paced world, one where everyone wants everything now, or better still, yesterday; and we want to change a lot of things.

From a tax perspective, we’ve found ourselves regularly in a position where tax laws are enacted overnight with little consultation, or high-level policy decisions are made and announced by the Government and it’s a case of urgently back-filling the detailed policy design and getting the laws enacted by the already determined due date. Alternatively, policy reform is mooted with an application date in mind, consultation takes place to help iron out the details but inevitably there comes a time when the policy needs to be converted into legislation, and this seems to frequently hit up against deadlines for having legislation included in a taxation bill. The result of all of the above has been an increasing amount of criticism about the quality of tax law drafting in New Zealand.

In response to concerns, Inland Revenue took the step of commissioning an independent review of taxation law drafting. The results of that review were publicly released last month. The review includes a comprehensive list of 40 recommendations to improve tax legislation.

While it may seem that criticism is being made of the Inland Revenue drafting unit, when the report is reviewed in whole, it illustrates that the drafting unit is the victim of everyone else wanting to do too much too quickly and/or leaving inadequate time for legislation to be drafted clearly and being subject to proper review before reaching parliament.

Increasingly tax legislation is becoming more complex and trying to deal with every conceivable scenario rather than taking a principled approach. The mixed-used asset and residential loss ring-fencing rules both get called out in the review as examples of complex regimes. The complexity of legislation is particularly concerning when the rules relating to common transactions apply to many taxpayers who may not have the resources to either understand the rules directly or to pay for professional advice. It is even more concerning when the legislation becomes so complex that even tax advisors have difficulty understanding it, a point noted in the review.

Poorly drafted and complex legislation leads to large amounts of downstream administration and compliance costs, including education, needing to effectively translate legislation into plain English, time-spent second-guessing and clarifying what legislation is intending to do, identifying errors in the legislation, and going through the time-consuming process of getting buy-in to make a legislative change and seeing that through the parliamentary process (which can take over a year). While it may feel great to say that a tax rule has been announced, developed and legislated in a short period, the job isn’t done until the legislation is working in a way that matches the policy intent. This can result in many years of tidying up avoidable mistakes.

It’s in everyone’s best interests if we can try to strike an appropriate balance between moving too quickly and moving too slowly (and conversely causing issues by having outdated legislation which doesn’t respond to new issues).

The drafting review, while shocking in some aspects, presents a useful opportunity for stakeholders in the tax system to take stock and to reassess how tax policy and legislation is developed. The constant need for speed on issues is clearly resulting in undesirable outcomes for everyone, not just those working in the Inland Revenue drafting unit.

December 2021 Tax Alerts