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Tax Principles Act off to an unprincipled start

Budget 2023

It’s no secret that the Inland Revenue has been working on the development of a “Tax Principles Act,” the item has been on the tax policy work programme and has been referenced by the Minister of Revenue during his 2022 and 2023 speeches on tax fairness.

In 2022, the Minister advised “[a]n important stage of the project will be wide public consultation on the proposed principles and reporting framework. We’ll be going [sic] that around the middle of the year, and hope you will share your views …. I would like to see these principles enacted in a Bill before the end of the current Parliamentary term.”

Well, mid-2022 came and went and there was no consultation. So, it was with some surprise (but not really, given recent history), that the Government made the decision to once again bypass seeking public feedback on a proposed tax law and has instead gone straight to legislation, in the form of the "Tax Principles Reporting Bill" (the Bill). This Bill will be tabled today (18th May 2023) and is expected to swiftly proceed through its Parliamentary processes and come into force on 1 July 2023.

Those who are keen followers of the tax system would probably say their No 1 tax principle would “we follow the Generic Tax Policy Process (GTPP)”. The GTPP has been in place since 1994 and is designed to ensure that tax laws are well thought through, and stakeholders have the opportunity to contribute to the design of laws.

The decision to bypass consultation on the Bill goes counter to the GTPP and is another example from this Government after introducing trust disclosure rules and extensive information gathering powers after the 2020 Election. The irony of the lack of GTPP on tax principles will not be lost on the tax community.

So, what are the tax principles that should be followed? Without having seen the legislation, we can only speculate based on what the Minister has previously listed as principles:

  1. Horizontal equity, so that those in equivalent economic positions should pay the same amount of tax
  2. Vertical equity, including some degree of overall progressivity in the rate of tax paid
  3. Administrative efficiency, for both taxpayers and Inland Revenue
  4. The minimisation of tax induced distortions to investment and the economy.

Aside from having principles to comply with, the Bill is expected to include information collection and monitoring requirements, i.e. how is a new tax law expected to satisfy the principles; has it actually achieved its purpose, etc.

You would expect that in many cases tax proposals will not satisfy all of the principles, for example, the denial of interest deductions on residential property would arguably fail all principles. The net outcome could be tax policy development gets tied in knots.

Given the possibility that this legislation will be pushed through under urgency, it sets the scene for an election period where all political party policies will be debated against these principles. Given the lack of consultation on what the tax principles are, it hardly seems a principled and perhaps gives a glimpse of what might be coming from the Labour Party Tax Policy – a simple tax change which increases horizontal and vertical equity?

As with most things tax related, the devil will be in the detail, and we’ll be preparing a summary once that detail has been revealed.

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