The Government looked as if it did not know what it was doing, and its immediate priority must be to rebuild confidence in its approach to tax policy, writes former revenue minister Peter Dunne
Opinion: The mystery of how the ill-fated plan to apply GST to KiwiSaver fund fees advanced as far as a bill before Parliament before its political implications dawned on the Government is still unfathomable.
But even more puzzling is how far the plan advanced along the policy development process before it was abruptly sunk.
Since 1994, successive governments have followed a process known as the Generic Tax Policy Process when it comes to developing new tax policy. This was developed after a series of sudden and controversial tax changes from Labour and National governments in the late 1980s and early 1990s that had left tax professionals, alongside the public, reeling from the scope and speed of change, and the often insufficient time allowed for proper implementation.
It was designed to ensure a more certain and predictable process and consequently better tax policy. Over the past 30 years or so, it has worked well and has been at the heart of every government’s tax policy formation process.
There are five general stages of tax policy process that can be spread over several years. First is the strategic phase where broad policy proposals emerge as part of the government’s overall economic and fiscal strategies, and the three-year revenue strategy.
After public consultation, the Ministers of Finance and Revenue then finalise and announce the government’s three-year tax policy work programme. Then, the broad plans agreed in the work programme are refined as specific proposals and released in formal discussion documents for more public consultation.
Following that consultation, legislation is drafted to implement the plans and approved by the Cabinet. The bill is then introduced to Parliament and referred to a select committee for further public submissions, before being passed into law.
Finally, there is a post-implementation review, including further external consultation, to ensure the new legislation is meeting its purposes.
The proposal to apply GST to KiwiSaver fund fees appears to have gone through these processes. Indeed, the Prime Minister implied as much with her confirmation that officials had been working on the plan since 2017.
In February 2020, Inland Revenue’s policy and strategy officials published an officials’ paper, GST Policy Issues, which included a complete chapter on the application of GST to managed funds such as KiwiSaver.
Although Inland Revenue’s language in the officials’ 2020 paper may appear obscure to the layperson, it should have been clear to tax professionals and more importantly to the close political advisers of the Ministers of Revenue and Finance that KiwiSaver fund fees were being targeted
That paper proposed “amending the GST Act definition of ‘financial services’ to provide a more certain and consistent GST treatment for manager and investment manager services supplied to managed funds”. Regarding KiwiSaver, the paper noted that “there is a specific GST exemption for the ‘management of a retirement scheme’.”
But it added: “It is important to ensure that GST treatment of various managed fund fees does not provide a significant competitive advantage for certain types of savings products, (or) managed funds.”
Drawing on international comparisons, the paper therefore proposed amending the GST Act to “provide a more certain and consistent GST treatment for manager and investment manager services supplied to managed funds”. Public submissions were invited on the plans, with a closing date of April 2020.
In normal circumstances, these proposals, amended as necessary following public consultation, would then have been included in the first tax bill of 2021, normally introduced around the middle of the year. But the disruption caused by the arrival of Covid-19 clearly saw the tax work plan delayed – hence the proposal not being included in legislation until this year.
However, that does not explain how it got as far as being in draft legislation before the government appreciated its significance and potential dramatic adverse political impact. Although Inland Revenue’s language in the officials’ 2020 paper may appear obscure to the layperson, it should have been clear to tax professionals and more importantly to the close political advisers of the Ministers of Revenue and Finance that KiwiSaver fund fees were being targeted.
Beyond those circles, KiwiSaver and managed funds managers should also have been fully aware of what was being proposed, and lobbying ministers, key backbenchers, and other parties about the implications.
Fund managers’ current claims not to have been consulted by the Government on the changes are hard to swallow, given the officials’ paper has been in the public arena for over two and a half years.
They are also at variance with the Minister of Revenue’s claim that until the legislation was tabled in the House, many smaller fund managers were indicating support for the plan, only to withdraw that at the last minute.
Whatever the truth, there has clearly been a massive failure of communication and comprehension about the Government’s plans.
In turn, that raises questions about Generic Tax Policy Process and how seriously it is being taken today. It also raises questions about the extent of the government’s tax policy consultation processes.
Over the years, including when I was Minister of Revenue, there were regular separate meetings on general tax issues with the Corporate Taxpayers Group, the Chartered Accountants’ and the Law Society’s specialist tax committees, and the managed funds industry.
Assuming these meetings still occur every three months or so as they used to under previous governments, it is hard to see how the KiwiSaver proposal escaped being raised, unless these meetings have become too perfunctory and irregular, because ministers now think they know best and do not need external or official advice.
Whatever the explanation, the big loser is the Government.
Although it quickly backed down as the outrage blew up, which was shrewd and a win for KiwiSavers, its already battered political stocks took another crippling blow. It simply looked as if it did not know what it was doing.
More importantly, though, the credibility and reliability of the tax policy formation process has also been severely dented. For nearly 30 years, successive Labour and National-led governments have worked hard to make that process more effective and predictable.
Following the recent debacle, the government’s immediate priority must be rebuilding confidence and trust in its approach to tax policy.