Why New Zealand's tax policy is gold standard

By Gary Anders

For decades, New Zealand’s Generic Tax Policy Process (GTPP) has been widely regarded as the gold standard for developing tax policy. 

Rather than tax policies being created in isolation by New Zealand’s Inland Revenue Department (IRD) and Treasury, and then enacted through legislation, a core component of the GTPP framework since it was introduced in 1994 has been early and ongoing public engagement. 

Following a detailed review, the GTPP was amended for the first time in 2019 to incorporate social engagement into New Zealand’s wider consultative approach for tax policy development. 

The IRD committed to having wider, earlier, and more frequent public consultation, including with the Maori community, the use of a greater variety of engagement methods, and to more transparency and accountability. 

“The purpose of interacting with the public is to improve customer, policy and regulatory outcomes, and to inform stakeholders in advance of regulatory changes,” the IRD says. 

“Submitters will often have better access to information on the size and nature of the problem and how the issues can best be solved. 

“Consultation can also enhance voluntary compliance, because it allows interested parties more time to understand why there is a need to change, and more time to adjust to changes.” 

Five key process phases

The development of tax policy in New Zealand using the GTPP framework encompasses five key phases. 

The first is the strategic phase, which involves the development of an economic strategy, a fiscal strategy and a revenue strategy. 

While no formal consultation processes are in place for this phase, broad policy proposals may be publicised through channels such as budget documentation.  

The second is the tactical phase of the GTPP, during which targeted consultation takes place with the private sector and interested parties to identify the tax policy issues that are important to them.

This is so the government can prioritise which tax policy issues will be addressed over the next 18 months. 

“Consultation on the development of the work program, combined with published information about the current work program, means that the public knows what changes are being contemplated,” the IRD says. 

In the third – operational – phase, formal detailed consultation currently takes place during detailed policy design.  

On major reforms, consultation will often involve the release of a government consultation document. 

“Normally, about six weeks are allowed for submissions, although sometimes this can take longer or shorter depending on the circumstances,” the IRD adds.

“During the submission period, officials have intensive face-to-face meetings with affected taxpayers.” 

The legislative phase is next, where the New Zealand government may either decide to start by taking into account what has been learned from submissions or asking for further consultation on specific issues before selecting and appointing a relevant committee and considering submissions from the public.

The committee, on advice from officials, may then recommend that further changes be made in line with those submissions, or recommend that submissions be declined. 

Thereafter, the policy will enter the implementation and review phase, at which point any remedial issues are also identified and addressed. 

Throughout each of these phases, there are opportunities for public engagement. 

Is the GTPP working?

There’s been strong support for the GTPP over time from other countries, including Australia, although a similar system is yet to be adopted elsewhere. 

Tax policy advice in New Zealand is jointly provided by the IRD and Treasury, but New Zealand is unique internationally by having the tax policy function led by the tax administrator (the IRD). 

“A consequence of the GTPP is that it increases the time it takes to develop and implement tax and social policy,” the IRD says. 

“The process also involves considerable time and resources for both the private sector and policy officials. However, most stakeholders believe the GTPP to be a valuable and essential part of building and maintaining a good tax system.” 

However, Adrian Sawyer FCPA, professor of taxation at the University of Canterbury Business School and member of CPA Australia's New Zealand Tax Committee, highlights a major issue with the GTPP – using the framework isn’t enshrined in New Zealand legislation. 

Sawyer points out that there have been numerous recent changes made to New Zealand tax laws, particularly in relation to COVID-19, without any public consultation. 

“Setting aside [GTPP] can be done with relative ease with no apparent direct consequences. The instances of setting aside of the GTPP provide strong evidence for its enactment into statute, perhaps with a special majority clause for its repeal,” Sawyer says. 

 

"The purpose of interacting with the public is to improve customer, policy and regulatory outcomes and to inform stakeholders in advance of regulatory changes."

 

“When a well-regarded policy process comes under serious threat, undermining many years of trust that have been underpinned by transparency and public consultation, this should draw attention and warrant investigation.” 

The GTPP incorporates a number of exceptions for when the New Zealand government may be justified in not using the framework. The IRD says these exceptions “will be used sparingly”. 

Exceptions include avoiding wider consultation for revenue protection or anti-avoidance measures, for measures included as part of the budget process, or where secrecy obligations may prevent officials from undertaking wider consultation. 

In addition, the IRD says urgent government priorities may sometimes require a more truncated policy development process. 

“In effect there is no formal mechanism in place to hold the government accountable should it fail to apply its own stated policy approach,” Sawyer says. 

“Prior instances of not following the GTPP provide evidence that the outcome without using the GTPP is suboptimal, leading to unnecessary remedial amendments and costs for taxpayers. 

“These developments suggest that the high regard in which NZ tax policy development is held internationally will wane, and the country will no longer be held up as a model to be explored with potential for wider adoption.”