Saturday, March 26, 2016

Michael Gousmett: Fixing an Anachronism - the Veterinary Services exemption from Income Tax


In 1955 the government of the day granted an exemption from income tax to veterinary services bodies in recognition of the importance of the work being undertaken by veterinary professionals in helping New Zealand’s post-war economy to develop.  

The exemption was backdated to 1951 and, 65 years later, remains in place. 

Yet there is clear evidence that the exemption is being taken advantage of by a number of today’s veterinary professionals while competing with their colleagues who run income tax paying practices.  This is no different, in terms of tax policy, of what is becoming more evident in the charity sector where large-scale trading enterprises undertaken under the guise of being charitable are competing with their for-profit counterparts.  

A recent example is the Ngai Tahu/Waikato Tainui owned company, Go Bus Limited, which is competing for business with companies such as Pavlovich Coachlines, but are able to undercut their pricing because of the advantage Ngai Tahu/Waikato Tainui have due to their income tax exempt status which allows the accumulation of funds that would otherwise be paid in income tax.  

I argue that in both cases there is a failure of tax policy at the most basic level, that of equity and fairness.  This year is the 240th anniversary of the publication of Adam Smith’s “Wealth of Nations,” yet here in New Zealand we have an anachronism in our tax policy that while arguing a broad base low rate system on the one hand, allows unfair competition on the other across the economy.


The concept of “vet clubs” arose out of the creation of the Veterinary Services Council in 1946 in order to improve access to veterinary services by the rural community, the Council having been established by the Veterinary Services Act 1946 (VSA 1946).  The purpose of the Council under the VSA 1946 at s 12(1) was “to promote and encourage the provision of efficient veterinary services for owners of livestock in New Zealand.”  

A 1985 research paper by Alan Grant, undertaken as part of the Kellog’s Rural Leadership Course at Lincoln University, noted that “the interests of existing private veterinary practices” were to be protected, while at the same time veterinary clubs were not to be given “an unfair trading advantage over existing private practices.”[1]  It is interesting that Grant had made that observation in 1985 which suggests that this was not an issue at that time, given that the exemption is still on the statute books.  

Concerns about unfair competition had been raised in the House in 1955 by the Hon Mr Watts during the debate on the Bill which introduced the exemption.  Watts claimed to have a copy of a letter written to the Prime Minister in which concerns were expressed about “the position of veterinary clubs [being] more favourable than that of private veterinarians. ... As they did not pay tax, they put the private veterinarians at a disadvantage.”[2]  

However, Watts was of the opinion that at that time “there is very little trading by veterinary clubs.  It is so small that it is not worth doing anything about that at this stage.”[3]  

The Right Hon Mr Nash concluded the debate with the comment that if veterinary clubs “engage in trading on a non-profit basis they would not be subject to tax because there would be no profit to tax.”[4]  The evidence today would suggest otherwise.


Over the years the veterinary services income tax exemption has been challenged, including from within the profession itself.  In 1955, the official journal of the New Zealand Veterinary Association, the New Zealand Veterinary Journal, published an interesting letter from a veterinary surgeon who declared that the VSC subsidised clubs “which are a burden on taxation [yet] refuses to extend subsidies to those farmers who prefer to support private practice.”[5]  

In 1961 a vet club member wrote that “[t]he tax free profits from drug sales are used by some clubs to help keep visit fees at a ridiculously low level ... .”[6]

In 1967, The Report of the Taxation Review Committee (the Ross Committee), noted that “many of these veterinary clubs carry on quite extensive business activities ... they thus compete both in buying and selling markets with other forms of enterprise whose profits are subject to taxation.  It is in keeping with our recommendations ... that veterinary and other similar clubs and societies or associations should be subject to tax on the profits derived from trading activities.”[7]

The Report of the Tax Force on Tax Reform (McCaw Report) in 1982 did not specifically consider the veterinary services exemption from income tax.  However, the McCaw Report did note that “[b]ecause they escape effective government control, tax expenditures seem to be more difficult to terminate.”[8]  In a parallel to this issue, the McCaw Report also noted that the government “should minimise the scope for avoidance and reduce the advantages accruing to [income tax exempt] charities which operate in competition with taxable businesses.”[9]  Clearly this same argument should be applied to veterinary services bodies.

The income tax exemption privileges of both veterinary services bodies and charities are classified as part of the budget papers in an annual Tax Expenditure Statement as “tax expenditures,” recognising but not quantifying the impact in these cases of forgone revenue.  In its submission to the Tax Review Committee (2001, McLeod Report), the New Zealand Business Round Table considered that the government should “identify those activities that are currently subject to concessional tax treatment and determine the extent to which those concessions arise from either explicit government policies aimed at subsidising particular activities or entities ... .”[10]  This is an oblique reference by the Round Table to the concept of tax expenditures.

However, a submission was made to the Tax Review Committee which specifically addressed the veterinary services concession.  The submitter, whose name has been withheld by Treasury, in noting that “[o]ver many years numerous vets (sic) have written on this matter to MPs, Ministers of Revenue and the Inland Revenue Department without success,” also made a number of pertinent observations.[11]  In particular, the submitter stated that:[12]

  • The original reasons for establishing a subsidised veterinary service have long since disappeared;
  • The farming industry has adapted to the removal of subsidies in a competitive economic environment [s]o why should the business of providing veterinary services by vet clubs be exempt from income tax under any circumstances in 2001?
  • This tax exemption is an anachronism and an inequity that should be removed from the tax legislation;
  • Some [vet] club practices have accumulated enormous assets, have turnovers of many millions of dollars and have become monopolies;
  • Their existence … provides an unfair tax advantage;
  • Vet clubs have an obvious commercial advantage over private practices;
  • There is no logical reason for [vet clubs] to be exempt [from income tax].

Even the OECD has an opinion on the veterinary services concession, as seen in its 2005 report, which noted that the exemptions “are historical.  The main advantage lies with the ability of these bodies to effectively re-invest their total profits in the provision of necessary infrastructure ... The concession is effectively one of allowing these activities to grow at a faster speed (due to the ability to reinvest all net profits earned rather than net profits after tax.”[13]


As well as an exemption from income tax, veterinary services bodies are also eligible for an exemption from tax on interest earned on bank deposits and dividend income under s 32E of the Tax administration Act 1994.  On introducing the Bill in 1989, the Hon David Caygill explained that the purpose of the proposed RWT was to “counter the substantial evasion and deferral of tax on interest and dividends that have been reported for several years, notably in the report of the McCaw task force on tax reform ... The Bill ... is consistent with [the Government’s] objective of closing tax loopholes and of attacking tax fraud.”[14]


The author’s privately-funded research paper was presented to the Minister of Revenue, at that time the Hon Todd McClay, in late 2015, who then forwarded the paper to Inland Revenue for appraisal.  In March 2016, the Minister of Revenue, the Hon Michael Woodhouse, advised the author that his “tax policy officials’ preliminary but considered views are”:[15]

  • That the taxation exemption that Veterinary Clubs now enjoy seems to have outlived its original purpose;
  • That the exemption is contrary to the “broad base, low rate, paradigm; and
  • That the case for its repeal should be considered.

The issue is now being considered by officials for inclusion in IR’s tax policy work programme.  The author is optimistic that in due course all the affected parties will have an opportunity to put their respective arguments, such as the impact any change in the current tax policy might have on pricing structures, or whether the government should consider an alternative means of supporting farmers through the provision of veterinary services, particularly in extreme trading conditions caused by natural events or international commodity trading.  

Whatever the government decides, the underlying issue, as acknowledged by Minister Woodhouse, are concerns about competitive advantage.  It follows then that the government also needs to give consideration to the unfair trading practices that are being undertaken by large-scale trading enterprises unrelated to the charitable purposes of their shareholding charities.

[1] Alan Grant, “The Veterinary Club Movement in New Zealand” [A] Project for the 1985 Kellog’s Rural Leadership Course at 4 at
[2] Land and Income Tax Amendment Bill, New Zealand Parliamentary Debates (NZPD) (26 October 1955) vol 307 at 3383-3384.
[3] NZPD, above n 2.
[4] NZPD, above n 2.
[5] Y.H. Leewenburg, “Correspondence” NZVJ (1955) vol 3 at 83.
[6] R. Jackson, “Drug sales and the veterinarian” NZVJ (1961) Vol 9 iss 4 at 81.
[7] The Taxation Review Committee,
 “Taxation in New Zealand” (October 1967) at §783.
[8] Task Force on Tax Reform, “Report of the Task Force on Tax Reform) (McCaw Report) (7 April 1982) 4.8 at 63. 
[9] McCaw Report, above n 8, 12.57 at 254.
[10] New Zealand Business Round Table, “Submission on the Tax Review 2001” (March 2001) at 49.
[11] [Anonymous], “Submission on income tax exemptions [S]ection 61 (28),” Private submission to the Tax Review Committee (21 February 200) provided to the author by Treasury in response to an OIA request.  The assistance provide by Treasury to the author is acknowledged.
[12] [Anonymous], above n 11.
[13] OECD, “Non-sectoral Policies for the Agriculture and Agri-food Sectors: Taxation and Social Security” (4 August 2005) at
[14] Income Tax Amendment Bill (No 8) NZPD (13 April 1989) at 10036.
[15] Hon Michael Woodhouse, Personal correspondence to the author (7 March 2016).

1 comment:

Ray S said...

Small potatoes compared to maori corporates who are classed as "charities"