HON ANNETTE KING, MINISTER OF HEALTH
MEMORANDUM TO CABINET SOCIAL POLICY AND HEALTH COMMITTEE
DISTRICT HEALTH BOARDS TAXATION ISSUES
EXECUTIVE SUMMARY
- Cabinet directed officials to report back on possible ways to mitigate tax avoidance risks that may be created if DHBs were non-taxable entities, and any transitional tax issues that may arise from the transfer of assets from HHSs to DHBs [CAB (00) M 10/4 refers]. At that meeting Cabinet did not confirm its intentions regarding the taxable status of DHBs.
- This paper provides a summary of the advantages and disadvantages of making DHBs taxable entities in order for Ministers to make a decision on the taxable status of DHBs. A decision on taxation issues is required in order for this to be included in legislation for introduction by 31 July. This paper also provides information on the mitigation of avoidance risks if Ministers choose to make DHBs tax-exempt and advice on transitional tax issues that may arise when HHSs become DHBs.
- On balance, Treasury and Inland Revenue Department recommend that DHBs should be established as taxable entities and that the DHB tax receipts be recycled to Vote: Health to maintain fiscal neutrality. The Ministry of Health and CCMAU are of the view that tax-exempt status would, on balance, be more consistent with the government's overall objectives for DHBs including their non-commercial and not-for-profit objectives. Health and CCMAU are of the view that if DHBs are made taxable there needs to be rules to ensure that DHBs are not taxed on their uncommitted funding.
- If Ministers decide to make DHBs tax-exempt this paper recommends that the avoidance concerns regarding joint ventures with taxable entities could be dealt with by incorporating additional restrictions as a part of the existing report back on "restrictions on DHBs entering financing or investment arrangements including joint ventures, financial or operating leases" by 31 August 2000. Decisions on restrictions are not required for the New Zealand Public Health and Disability Bill. The Ministry of Health also considers that the accountability framework for DHBs will provide a further mechanism to mitigate this risk to the Crown.
- This paper recommends that the legislation should ensure that no tax implications arise from any transfer of assets from existing health agencies to the DHBs.
INTRODUCTION
- At its meeting on 19 June 2000 Cabinet directed officials to report back on possible ways to mitigate tax avoidance risks that may be created if DHBs were non-taxable entities, and any transitional tax issues that may arise from the transfer of assets from HHSs to DHBs [CAB (00) M 10/4 refers].
- This report provides information on the mitigation of avoidance risks if Ministers choose to make DHBs tax-exempt and advice on transitional tax issues that may arise when HHSs become DHBs. This paper also provides a summary of the advantages and disadvantages of making DHBs taxable entities in order for Ministers to make a decision on the taxable status of DHBs. A decision on taxation issues is required in order for this to be included in legislation for introduction by 31 July 2000.
TAX AVOIDANCE RISKS MITIGATED IF TAX EXEMPT STATUS IS PREFERRED
- Ministers have already decided, in principle, that DHBs should not be given unlimited powers to access private sector financing, other than for working capital [CAB (00) M 10/4 refers]. This decision limits the ability of DHBs to engage in tax avoidance activity and to a certain extent mitigates the concerns that officials had raised. The extent of the mitigation is dependent upon final decisions by Cabinet.
- Ministers have directed officials to report back by 31 August 2000 on "restrictions on DHBs entering financing or investment arrangements including joint ventures, financial or operating leases". If it was decided that DHBs should be tax-exempt this report back would be the most appropriate opportunity for any taxation issues relating to joint ventures to be addressed. The Ministry of Health also considers that the accountability framework for DHBs will provide a further mechanism to mitigate this risk to the Crown.
- Ministers should note that the majority of HHSs are currently in significant tax loss positions. This means that they have the ability to act as if they were tax-exempt now. Inland Revenue have indicated that audits of HHSs have provided no indication that they are using this position for tax avoidance activity.
ADVANTAGES OF MAKING DHBS TAXABLE
- The range of advantages from making DHBs taxable is summarised as follows.
Tax Avoidance Risks
- Making DHBs taxable eliminates a range of tax avoidance opportunities that are available to exempt entities and ensures that decision making is not adversely affected. Making DHBs taxable will always be more effective in countering tax driven behaviour than any other set of rules.
- If they were exempt, DHBs could enter joint ventures with other taxpayers (such as doctors or other privately owned taxable health providers) that allowed the taxpayer to avoid tax on profits made through the venture by splitting the joint venture's income and expenses for tax purposes in a way that minimises the taxpayer's taxable income. Joint ventures have been used to take advantage of the tax-exempt status of US health sector providers.
- Other known examples include arrangements between DHBs and taxable entities to take advantage of differences in tax rates, depreciation and tax deductibility. Further detail of these arrangements is included as appendix one.
Distorting DHB Funding Decisions
- Making DHBs taxable would ensure that their decisions regarding the funding of services would not be distorted. If, tax-exempt the cost of providing services 'in house' would be artificially lower compared to providers that are taxed. This means that the best service may not be funded. Officials are not aware of any practical rules which could be imposed to remove this distortion, without unduly hampering DHBs' ability to carry out their operations.
Compliance with Inland Revenue Acts
- The existing taxable status of HHSs has imposed a business-like discipline on their record keeping such as asset registers for tax depreciation purposes. There was considerable cost associated with establishing these systems when the predecessors to HHSs were established as taxable entities. We understand that by comparison ongoing compliance costs are not significant. Making DHBs tax-exempt would remove the requirement for DHBs to maintain their current level of business records.
Tax Treatment of other Health Providers
- Maintaining the current tax treatment of HHSs means that the possibility of removing the tax-exempt status of other health providers remains open. Making DHBs tax-exempt because other providers (such as Southern Cross) are currently tax-exempt may be inappropriate, given the possibility that some tax-exempt providers could lose their exempt status if Government decides to proceed with a review of the taxation of charities.
