Treasury Report: 2006 Budget - Revised Vote Revenue: Joint recommendations with Inland Revenue Date: 1 March 2006 Treasury Priority: High Security Level: B-S-UNTIL-BUDGET-DAY Report No: T2006/284 Action Sought Minister of Finance (Hon Dr Michael Cullen) Associate Minister of Finance (Hon Trevor Mallard) Action Sought Note contents Note contents Deadline Vote Revenue bilateral 1 March 2006 at 4.30pm None Contact for Telephone Discussion (if required) Name Position Telephone 1st Contact [Information deleted in order to protect the privacy of natural persons, including deceased people] David Snell Acting Manager, Tax Policy Enclosure: No Treasury:830404v1
28 February 2006 DH-8-1-1-4 Treasury Report: 2006 Budget - Revised Vote Revenue: Joint recommendations with Inland Revenue Executive Summary 1. At the pre-bilateral meeting on Monday 27 February 2006 Treasury was instructed to negotiate with Inland Revenue an agreed position in terms of the Vote Revenue funding with a view to eliminating the potential impact on Inland Revenue s performance, including the level of tax revenue. We understand that this was confirmed with Mr Dunne in a subsequent discussion. 2. Officials have had further discussion enabling us to propose new agreed recommendations, attached. 3. The new agreed recommendations require an additional $22.360 million in 2006/07, decreasing to an additional $18.750 million in 2009/10, to be allocated to Inland Revenue in Budget 2006, compared with what had previously been recommended by Treasury ($19.910 million in 2006/07, increasing to $52.800 million in 2009/10) (T2006/254 refers). This takes total additional funding recommended by Treasury and Inland Revenue in this bilateral to $42.270 million in 2006/07 (increasing to $71.550 million in 2009/10). Treasury s earlier advice had been prepared on the basis that some degree of reduced performance could be contemplated in light of the overall fiscal constraint. 4. [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice]. 5. In view of the government s focus on remuneration pressures you may wish to have a broader discussion on Inland Revenue s approach to managing labour costs. T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 2
Recommended Action We recommend that you read the attached briefing and use it as a basis for reaching decisions in the Vote Revenue bilateral with Hon Peter Dunne on 1 March 2006. [Information deleted in order to protect the privacy of natural persons, including deceased people] for Secretary to the Treasury Hon Dr Michael Cullen Minister of Finance T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 3
Treasury Report: 2006 Budget - Revised Vote Revenue: Joint recommendations with Inland Revenue Purpose of Report 1. To advise you of details of the bilateral funding package jointly recommended by Treasury and Inland Revenue for Vote Revenue, following discussion at the pre-bilateral briefing on Monday 27 February 2006 that you desired Treasury and Inland Revenue to reach an agreed position. Analysis 2. At the pre-bilateral meeting on Monday 27 February 2006 Treasury was instructed to negotiate with Inland Revenue an agreed position in terms of the funding for Vote Revenue with a view to eliminating the potential impact on Inland Revenue s performance including the impact on tax revenue. We understand that this was confirmed with Mr Dunne in a subsequent discussion. 3. Discussions between Inland Revenue and Treasury on Tuesday 28 February 2006 with this objective in mind have lead to a largely agreed position. 4. The agreed position requires an additional $22.360 million in 2006/07, decreasing to $18.750 million in 2009/10, to be allocated to Inland Revenue in Budget 2006. This additional funding: is on top of the funding previously recommended by Treasury ($19.910 million) for Vote Revenue, taking the total recommended additional funding to $42.270 million in 2006/07 rising to $71.550 million in 2009/10; is $17.854 million (or 30%) less than Inland Revenue had originally proposed; and [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice].. 5. You should note that Treasury recommendations for the Other Allocation (as reported in BR2006/24) balanced over the term, though it was $7 million oversubscribed in 2006/07. The revised recommendations for Vote Revenue added to Treasury s recommendations for the remainder of the Other Allocation would result in the allocation being oversubscribed by $29 million in 2006/07 and $7 million in the outyears. 6. [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice]. T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 4
7. [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice]. 8. Treasury and Inland Revenue have also reached an agreed position on the additional capital funding sought in this bilateral. 9. A revised draft of the recommendations for the Vote Revenue bilateral is attached with a table which illustrates the agreed positions. Recommendations (revised) VOTE REVENUE Return of implementation costs: a Note that Inland Revenue plans to return to the Crown funding from the following initiatives: Net Extensions to Working for Families Student loan no-interest and amnesty Taxation of contractors in the fruit picking industry (0.900) - - - - (0.600) - - - - (0.500) (0.750) (0.750) (0.750) Evidence of Identity (1.600) Capital 2005/06 2006/07 2007/08 2008/09 2009/10 & Extensions to Working for Families Student loan no-interest and amnesty Taxation of contractors in the fruit picking industry (1.200) - - - (1.000) - - - (0.250) b Agree that the Minister of Revenue retain the savings in recommendation a to fund Budget 2006 Vote Revenue initiatives as agreed in this bilateral. Agree/not agree T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 5
c Agree that the $1.600 million of savings returned in 2005/06 for Evidence of Identity be available to offset the cost of initiatives in 2006/07. Agree/not agree d Note that if recommendation b is not agreed then savings are returned to the Crown. e Note the net impact from funding the initiatives jointly recommended by Inland Revenue and Treasury in this bilateral, after offset from new savings returned in recommendation a and draw down from the existing Savings Allocation is: Total new savings (1.500) (2.100) (0.750) (0.750) (0.750) Funding drawn down from existing Savings Allocation Total initiatives jointly recommended (0.700) (0.300) - - - 1.641 44.370 42.900 54.400 72.300 Net impact (0.559) 41.970 42.150 53.650 71.550 Capital (GST excl) 2005/06 2006/07 2007/08 2008/09 2009/10 & Total new savings (2.200) (0.250) - - - Funding drawn down from existing Savings Allocation Total initiatives jointly recommended (2.100) - - - - 4.110 5.870 3.000 2.500 - Net impact (0.190) 5.620 3.000 2.500 - T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 6
f Extension of eligibility and entitlements under Working for Families Vote Minister rank = 1 Treasury rank = 1 Inland Revenue and Treasury have reached an agreed position on the funding needed for the ongoing delivery of the extension of eligibility and entitlements under the Working for Families package. The agreed cost does not include operating contingencies, but does include an element of National Office overhead considered reasonable in these circumstances. Joint recommendation - 6.700 4.500 4.300 4.300 g [information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials] h Note that the funding recommended by Inland Revenue will allow the Department to meet additional taxpayer contacts as a result of the extensions to the Working for Families package as detailed below: 90,000 additional general calls through call management; 129,000 calls in relation to Personal Tax Summaries, IR 3 returns, and debt issues; and that Inland Revenue s response to these additional contacts will be within the performance standards set out in Inland Revenue s current Statement of Intent. i No-interest student loans and student loan amnesty Vote Minister rank = 2 Treasury rank = 2 Inland Revenue and Treasury have reached an agreed position on the funding necessary for the delivery of student loan no-interest, amnesty and voluntary repayments policy changes. The agreed costs do not include an operating or capital contingency, or funding for overheads. Joint recommendation - 10.400 4.300 4.300 4.300 Capital 2005/06 2006/07 2007/08 2008/09 2009/10 & T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 7
Joint recommendation - 1.500 - - - j [Information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials] k Note that the funding recommended by Inland Revenue will allow the Department to meet the additional contacts from student loan borrowers as a result of student loan no-interest and amnesty policy changes as detailed below: 86,000 additional general calls through call management; 10,750 additional calls through service centres; An additional 5,000 pieces of correspondence; and Inland Revenue s response to these additional contacts will be within the performance standards set out in Inland Revenue s current Statement of Intent. l KiwiSaver Vote Minister rank = 3 Treasury rank = 3 Inland Revenue and Treasury have reached an agreed position on the draw down of funding from the existing Savings Allocation to cover project implementation costs and to finalise the evaluation strategy. Joint recommendation 0.700 0.300 - - - Capital (GST excl) 2005/06 2006/07 2007/08 2008/09 2009/10 & Joint recommendation 2.100 - - - - m Agree that the operating and capital components of the KiwiSaver initiative will be funded from the existing Savings Allocation. Agree/disagree T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 8
n Taxation of Investment Income and SSCWT Vote Minister rank = 4 Treasury rank = 4 Inland Revenue and Treasury have reached agreement over the funding necessary for the delivery of, and systems changes from, the Taxation of Investment Income proposals. Agreed costs do not include project contingencies, are based on common assumptions surrounding taxpayer responses, and include some provision for overhead costs. Joint recommendation - 3.200 5.550 6.650 3.550 Capital 2005/06 2006/07 2007/08 2008/09 2009/10 & Joint recommendation 1.800 3.400 3.000 2.500 - o Note that Inland Revenue based part of the cost of this initiative on an assumption that 50,000 additional taxpayers will need to file IR 3 returns as a result of the offshore proposals. p Payroll Subsidy Vote Minister rank = 5 Treasury rank = 5 Inland Revenue requires a new non-departmental appropriation to meet the impact on the operating balance arising from the provision of a subsidy for employers using a payroll agent, for up to five employees. Inland Revenue and Treasury jointly recommend that the payroll subsidy should be set at $2.00 per employee per pay day. q Agree to a subsidy of $2.00 per employee per pay day, for up to five employees for employers using a payroll agent, with the following costs: Subsidy of $2.00-4.900 10.500 21.500 42.500 Agree/disagree T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 9
r Direct Inland Revenue to report back to the Minister of Revenue with the title and scope of a new non-departmental appropriation for the payroll subsidy before 7 March 2006. s Retaining people and capability Vote Minister rank = 6 Treasury rank = 9 [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice]. Inland Revenue indicate that the anticipated cost of retaining people and capability will be $14.400 million. The Department will also have to manage residual customer growth of $5.400 million. Inland Revenue indicate that if additional funding is available for retaining people and capability, the Department will find efficiencies to absorb the customer growth. [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice]. $million increase/(decrease) Joint Recommendation - 14.400 14.400 14.400 14.400 t Note that Inland Revenue has signalled a strong commitment to fund this initiative from within baselines if no funding is available for this initiative through the Budget 2006. u [Information deleted in order to avoid prejudice to the substantial economic interests of New Zealand]. v Note that if Inland Revenue receives the agreed funding, then the Department will realise efficiencies of up to 6% in order to manage the remaining customer growth pressures. Management of customer growth will result in additional tax revenue of $6.000 million and $35.000 million additional cash collections. T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 10
w Addressing current infrastructure pressure Vote Minister rank = 7 Treasury rank = 10 Inland Revenue and Treasury recommend that additional funding be provided for an additional lease entered by the Department to manage growth pressures, additional funding is necessary because the Department is unable to manage this cost within baselines without a consequent decrease in performance. [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice]. [information deleted in order to enable the Crown to negotiate without disadvantage or prejudice] Total - 1.500 1.700 1.300 1.300 x Protecting the integrity of the tax system Vote Minister rank = 8 Treasury rank = 8 Treasury and Inland Revenue recommend that additional funding is provided to increase capability in technical and policy areas in response to emerging pressures. While it is likely that these additional resources will predominantly be for Policy Advice, additional resources in investigations and debt management should also be provided through the additional funding. Joint recommendation - 1.500 1.500 1.500 1.500 y [information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials] T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 11
z Student loan information technology system rebuild for Inland Revenue Vote Minister rank = 9 Treasury rank = 6 The Department proposes additional funding to develop a detailed business case to scope and detail options for the rebuild of the student loan information technology (IT) system. Treasury supports additional funding for this proposal. Treasury expects that Inland Revenue s business case will set out in detail the benefits and all of the risks and costs associated with such a major IT project. Net Joint recommendation 0.600 0.900 - - - aa Student loan data match (Co Vote Customs) Vote Minister rank = 10 Treasury rank = 7 Inland Revenue and Treasury have agreed that additional funding is provided for the development of a data matching process between Customs and Inland Revenue to identify those student loan borrowers who are resident overseas and do not qualify for an interest write off. Departments have agreed that Inland Revenue can manage half of the capital cost of this proposal from within existing resources. Joint recommendation 0.341 0.570 0.450 0.450 0.450 Capital 2005/06 2006/07 2007/08 2008/09 2009/10 & Joint recommendation 0.210 0.970 - - - bb Note that Vote Customs is seeking operating funding through the Economic Transformation Theme, and capital funding through the Tertiary Education capital bilateral. T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 12
cc [Information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials]. dd Note that Inland Revenue have withdrawn the Budget initiative withholding of tax from ACC attendant care payments made to claimants. ee Note that Inland Revenue has agreed to defer the initiative student loan information technology system rebuild implementation for consideration in Budget 2007. ff [Information deleted in order to enable the Crown to negotiate without disadvantage or prejudice]. gg Note that Ministers are to discuss policy aspects of the proposals regarding the Taxation of Investment Income prior to the bilateral on 1 March 2006. If necessary, decisions taken in that meeting will be reflected in the Vote Revenue bilateral minute. hh Note that the initiative relating to the racing levy and bloodstock depreciation, seeking $36.000 million in outyears and affecting Vote Revenue, will be discussed in the bilateral with the Minister for Racing (Rt Hon Winston Peters) on Wednesday 1 March. Performance Information ii [Information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials]. Direct T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 13
Table of Initiatives by Vote (revised) Operating Rank Initiative Minister Seeks Treasury Vote Minister Treasury 2005/06 2006/07 2007/08 2008/09 outyears 2005/06 2006/07 2007/08 2008/09 outyears Extension of eligibility and -0.900 6.700 4.500 4.300 4.300-0.900 6.700 4.500 4.300 4.300 1 1 entitlements under Working for Families No-interest student loans and -0.600 10.400 4.300 4.300 4.300-0.600 10.400 4.300 4.300 4.300 2 2 student loan amnesty 3 3 KiwiSaver 0.700 0.300 0.000 0.000 0.000 0.700 0.300 0.000 0.000 0.000 Taxation of Investment Income 0.000 3.200 5.550 6.650 3.550 0.000 3.200 5.550 6.650 3.550 4 4 and SSCWT 0.000 4.900 10.500 21.500 42.500 0.000 4.900 10.500 21.500 42.500 5 5 Payroll Subsidy 6 9 Retaining People Capability 0.000 14.400 14.400 14.400 14.400 0.000 14.400 14.400 14.400 14.400 Addressing current 0.000 1.500 1.700 1.300 1.300 0.000 1.500 1.700 1.300 1.300 7 10 infrastructure pressure 8 8 Protecting the integrity of the tax system 0.000 1.500 1.500 1.500 1.500 0.000 1.500 1.500 1.500 1.500 9 6 10 7 2009/10 & 2009/10 & [information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials] 0.600 0.900 0.000 0.000 0.000 0.600 0.900 0.000 0.000 0.000 Student loan information technology system rebuild for Inland Revenue Student loan data match (Co 0.341 0.570 0.450 0.450 0.450 0.341 0.570 0.450 0.450 0.450 Vote Customs) [information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials] T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 14
Vote Rank Initiative Minister Seeks Treasury Minister Treasury 2005/06 2006/07 2007/08 2008/09 outyears 2005/06 2006/07 2007/08 2008/09 outyears Withholding of tax from ACC 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 attendant care payments made to claimants Student loan information 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 technology system rebuild Taxation of Contractors in the 0.000-0.500-0.750-0.750-0.750 0.000-0.500-0.750-0.750-0.750 n/a fruit picking industry n/a Evidence of identity 0.000-1.600 0.000 0.000 0.000 0.000-1.600 0.000 0.000 0.000 Total Recommended 0.141 42.270 42.150 53.650 71.550 0.141 42.270 42.150 53.650 71.550 2009/10 & 2009/10 & Capital Rank Initiative Minister Seeks Treasury Vote Minister 1 1 2 2 Treasury 2005/06 2006/07 2007/08 2008/09 3 3 KiwiSaver 4 4 10 7 n/a Extension of eligibility and entitlements under Working for Families No-interest student loans and student loan amnesty Taxation of Investment Income and SSCWT Student loan data match (Co Vote Customs) Taxation of Contractors in the fruit picking industry 2009/10 & outyears 2005/06 2006/07 2007/08 2008/09 2009/10 & outyears (1.200) - - - - (1.200) - - - - (1.000) 1.500 - - - (1.000) 1.500 - - - 2.100 - - - - 2.100 - - - - 1.800 3.400 3.000 2.500-1.800 3.400 3.000 2.500-0.210 0.970 - - - 0.210 0.970 - - - (0.250) (0.250) TOTAL RECOMMENDED 1.910 5.620 3.000 2.500-1.910 5.620 3.000 2.500 - T2006/284 : 2006 Budget Revised Vote Revenue: Joint recommendations with Inland Revenue Page 15