Part 1: Setting and Administering Salaries and Other Entitlements

Parliamentary salaries, allowances and other entitlements.

2: Why MPs Are Paid

What Does an MP Do?

201
An MP's job involves a variety of roles and responsibilities. Among other things, the job involves:

  • Ensuring that the interests of the people are represented in all aspects of parliamentary business, and in other domestic and international forums. This requires the identification, analysis and presentation of local and international issues in Parliament and, in some cases, outside the country.
  • Contributing to the development of new laws or the amendment of existing laws, through participating in debate in the House of Representatives and in its committees. This also involves making sure that the views of their constituents or the communities of interest they represent are considered in their contributions.
  • Sitting on select committees and contributing to their scrutiny of the activities of executive government, and other issues of interest to the public, and hearing any evidence on those matters as they see fit.
  • Closely examining the operations and performance of the Government and government departments through -
    • the conduct of Financial Reviews, whereby select committees scrutinise departmental expenditure and activities over the preceding year, and compare this activity against what the Government said it would achieve in that year;
    • the examination of the Budget, whereby the Government's overall proposals for future expenditure are scrutinised; and
    • the examination of the Estimates of Expenditure, whereby select committees scrutinise departmental bids for future funding.
  • Making representations to the Government on behalf of individual constituents.

202
Also as part of their job, MPs must meet the public's expectations that their MPs will, from time to time, be:1

  • Counsellors. People go to their MP with many different types of problems which they want to talk through.
  • Experts on the operations of the Crown. People expect that their MP will have a good knowledge of how government agencies work, and so will be able to offer informed advice to those who come to them for assistance on how agency processes will affect them.
  • Advisers and advocates. A constituent might ask their local MP for advice about a problem he or she may have, and to promote his or her cause with relevant agencies.

203
All of the foregoing roles require an MP to keep up with debate on public issues in order that they are able to effectively advocate in Parliament (both orally and in writing) for their constituents or communities of interest.

204
The Prime Minister and other Ministers are MPs, and also must fulfil an additional role as Ministers of the Crown. As the chief minister the Prime Minister is the public voice of the Government. In order that the country is governed in an effective and co-ordinated manner, the Prime Minister must, among other things:2

  • form and maintain a government (which may involve establishing and managing a coalition between political parties);
  • determine portfolio allocations - including each portfolio's area of operation, the legislation administered within the portfolio, the department(s), Crown entities and other organisations reporting within the portfolio, and (where necessary) the relevant Vote(s);
  • maintain and co-ordinate the Government, by overseeing the Government's general policy direction; and
  • approve the agenda for Cabinet meetings, lead the meetings, and be the final arbiter of Cabinet procedure.

205
The Prime Minister is usually in charge of the New Zealand Security Intelligence Service and the other intelligence services.

206
In addition to their role as MPs, Ministers are responsible for (among other things):3

  • determining policy and exercising relevant statutory powers and functions within their portfolios (e.g. health, Maori affairs);
  • protecting the Crown's interest in the agencies within their portfolios, and exercising their responsibility to Parliament for ensuring that those agencies carry out their functions properly and efficiently;
  • seeking parliamentary appropriations to fund outputs in their portfolio area to be supplied by departments, Crown entities or organisations outside the public sector, and to incur other expenses (such as the payment of social security benefits); and
  • sponsoring new legislation throughout its passage through Parliament to enactment.

Paying MPs for What They Do

207
The level of pay and allowances necessary to secure representation of the people in Parliament has been a constant issue of debate since the establishment of Parliament in New Zealand. At first, MPs received an honorarium for each session of Parliament that they attended. This was introduced in 1854.4

208
However, in both New Zealand and Australia there was concern that parliamentarians should receive any payment at all for what was at that time a part-time role. The view that emerged was that, in order for elected MPs to have an equal opportunity to represent their communities in Parliament, MPs needed to be paid. In New Zealand, this was clearly expressed by Julius Vogel in 1871:

… in the colonies payment of members would be necessary, and was necessary, to secure the best possible Government.5

209
The New Zealand view echoed similar comment in the State of New South Wales in 1861:

… it is necessary, to the adequate representation of the people in this House that members be compensated for their attendance.6

210
Over time, the notion of an honorarium – a fee for professional services nominally rendered without payment (Concise Oxford Dictionary) – was replaced by a recognition that being an MP is an occupation, for which an individual should be paid a salary like any other person engaged in employment.

211
However, MPs' remuneration arrangements have always been surrounded by a system of allowances and other entitlements. It is fair to say that the status of these allowances and other entitlements – particularly in relation to what an MP is "paid" – has not always been clear.

212
Partly for this reason, we think, the public has not looked favourably upon increases to MPs' salaries and entitlements. In 1951 the Royal Commission Upon Parliamentary Salaries and Allowances commented:

The ordinary citizen is inclined to think that whatever his Member [of Parliament] is paid, is enough or too much, even if he does not know the amount or does not reflect upon the work that is done for the payment received.7

213
This scepticism is to be expected, as the nature of MPs' salaries and other entitlements, and the processes for setting them, are not completely clear.

3: What Are MPs Paid for What They Do?

Salaries

301
It has come to be accepted that anyone engaged in an occupation should expect to be remunerated to an extent commensurate with the work they do or the services they provide.

302
In many ways, the occupational expectations of MPs are no different. The professional and full time nature of an MP's or Minister's work cannot be underestimated.

303
The Royal Commission upon Parliamentary Salaries and Allowances of 1951 recognised this fact when it said:

We use the term "professional" in the strict ordinary sense of the word – that is, the Minister or Member gives skilled, continuous service requiring ability, training, and experience. All Ministers must abandon their private occupations so long as they hold office, and many Members must do the same.8

304
The influence of the 1951 and subsequent Royal Commissions in establishing principles to guide the setting of parliamentary salaries and allowances was far reaching. The 1973 Royal Commission accepted and restated the following principles, which had been variously established by previous commissions:

(a) that the occupation of a member of Parliament should be regarded as virtually full time and professional in nature;
(b) that it should be assumed that a member of Parliament has no other income;
(c) that it should be accepted that members are married with family commitments; and
(d) that regard should be had to the sacrifices a member and his wife (or husband) have to make in their enjoyment of leisure and family life.9

305
The HSC accepted these principles when it took over responsibility for Parliamentary salaries and allowances in 1974.

306
But the HSC’s task is an unenviable one. The HSC must set remuneration having regard to the requirements of the job and the conditions and remuneration paid to those in comparable positions. And the HSC also has to take account of the following specific statutory criteria when setting levels of remuneration:

  • the need to achieve and maintain fair relativity with the levels of remuneration received elsewhere;
  • the need to be fair both –
    • to the persons whose remuneration is being determined; and
    • to the taxpayer; and
  • the need to recruit and retain competent persons.10

307
Appendix 1 on page 75 outlines some of the key developments affecting MPs’ salaries and allowances since 1854.

Allowances and Other Entitlements

308
It is also generally understood that a person engaged in an occupation may need to incur certain expenses while they are working in order to carry out a particular task. These expenses could include, for example, the cost of travel to another town on business, or the cost of special equipment.

309
The range of allowances and other entitlements available to MPs and Ministers is described in the following paragraphs and summarised in Figure 2 on page 24. The rates and other details of allowances are given in Appendix 2 on pages 76-78.

Allowances Determined by the HSC

310
The Parliamentary Service and Ministerial Services administer the allowances determined by the HSC for MPs and Ministers respectively.

311
In 1990, the HSC made the following comment on the nature of the allowances it sets for MPs and Ministers:11

The Commission distinguishes between –

(a) Benefits which are available by virtue of the type of employment or the position held:
(b) Reimbursement of the costs incurred in the course of employment.

The Commission’s function being to determine the salaries and allowances of Parliamentarians, it has no jurisdiction over category (a) – which may or may not have a monetary value12 – but with category (b).

The allowances which form part of this determination are viewed purely as reimbursements of costs incurred by Parliamentarians in providing the services electors expect of them.

312
This view of the HSC – that the allowances paid to MPs are for reimbursement of expenses incurred by them in providing the service expected of them by the electorate – has been reiterated for a number of years.

Other Entitlements Provided to MPs by the Parliamentary Service

313
The Speaker – on advice from both the PSC and the Parliamentary Service – determines the following specific entitlements for MPs, which are administered by the Parliamentary Service:13

  • Communications – A variety of communications services are available to MPs, which they can also use for personal purposes.
  • Domestic air travel, and road and rail travel – Any MP and his or her spouse (or nominee) is entitled to travel on scheduled air services throughout New Zealand, the cost of which is met fully from Vote Parliamentary Service. The cost of air travel by dependent children is also met in specified circumstances. Similar criteria apply to the cost of long-distance rail and road travel.
  • International air travel – A rebate, on an increasing scale depending on the length of service, will be paid on international air travel by an MP (who is also a member of the Commonwealth Parliamentary Association) on a scheduled airline. An MP’s spouse is also able to make use of this privilege.
  • Self-drive cars – A self-drive car is available to the Speaker, the Deputy Speaker, the Leader of the Opposition, and other Party Leaders (depending on the number of party members).
  • VIP transport – VIP Transport chauffeur-driven cars can be used at any time, 24 hours a day, seven days a week by the Speaker, the Deputy Speaker, the Leader of the Opposition, and (depending on the number of party members) other Party Leaders.

314
The Parliamentary Service also administers a subsidised superannuation arrangement (determined by the HSC) for MPs elected after 30 June 1992.

Other Entitlements Provided to Ministers and Members of the Executive by Ministerial Services

315
The Minister Responsible for Ministerial Services determines the following entitlements for Ministers and members of the Executive, which are administered by Ministerial Services:14

  • Ministerial residences – A residence is available to members of the Executive (who do not live in Wellington).
  • VIP transport – Ministers and their spouses have the use of VIP Transport chauffeur-driven cars at any time, 24 hours a day, seven days a week.
  • Self-drive cars – Ministers are entitled to a self-drive car for use by themselves and members of their immediate family. Ministers inside Cabinet also have access to pool cars to use in Wellington.
  • Telecommunications – Ministers have available to them a variety of entitlements (such as home fax machines and telephones), with all charges/costs incurred being met by Ministerial Services.

Miscellaneous Other Entitlements

316
MPs and Ministers have some other entitlements. These may include, for example, membership of VIP travel clubs (e.g. Air New Zealand’s Koru Club, and the former Ansett Golden Wing Lounge).

Figure 2
Summary of Entitlements of MPs and Ministers

Entitlements Who Gets Them? Who Sets Them?
MPs Ministers HSC Speaker Minister of
Ministerial
Services
Salary x x x

Employer Superannuation Contribution x x x

Basic Expenses Allowance x x x

Office[-holder] Expense Allowance (a) x x x

Constituency Allowance (b) x
x

House Allowance (a) x x x

House and Grounds Maintenance Allowance (a) x x x

Motor Vehicle Purchase Allowance (c) x
x

Security System Purchase Allowance x x x

Wellington Accommodation Allowance x x(d) x

Day Allowance x
x

Night Allowance x
x

Travelling Allowance x(e) x x

Car Reimbursement x
x

Travel – domestic: air/rail/bus x x
x x
Travel – international: air x x
x x
Communications facilities x x
x x
Self-drive car x(f) x
x x
VIP transport x(f) x

x
Ministerial residence
x

x
VIP Travel Clubs x x
x x

Notes –
(a) Limited to certain people – see Table B in Appendix 2, page 77.
(b) Payable to Constituency MPs only.
(c) Payable to Constituency MPs only, and offset against their Constituency Allowance.
(d) Payable in certain circumstances.
(e) Payable only to the Speaker and (in certain circumstances) the Leader of the Opposition.
(f) Limited to certain people – see paragraph 313.

So What Can an MP or Minister Actually Receive?

317
Recent commentary in the media has attempted to identify the true nature of an MP’s total remuneration. However, some commentators have grossly overstated “total remuneration” by including those allowances that are intended to reimburse an MP for actual and reasonable expenses incurred. In our view, these allowances should not be counted as part of an MP’s total remuneration.

318
The table in Figure 3 below sets out our understanding of what salary and allowances an MP or Minister could receive in a year by way of regular fortnightly payment. The table is based on the current salary and allowances set by the HSC, and does not include any of the other entitlements described in paragraphs 314-316 and included in Figure 2. Some of these entitlements would increase the value of overall remuneration if counted as ‘remuneration’.

Figure 3
What a Constituency MP, a List MP, and a Minister Could Expect to Receive in a Year


 Constituency MP
$		 List MP
$		 Minister
$
Salary 85,000 85,000 149,200
Basic Expense Allowance (not taxed) 7,000 7,000 12,000
House and Grounds Maintenance Allowance (not taxed) – – 1,500
Constituency Allowance (Year 2001 Class C, not taxed – see Table C, Appendix 2, page 00) 14,000 – –
Day Allowance (based on 84 sitting days proposed for 2001 @ $56 a day, not taxed)15 4,704 4,704 –
Total annual salary and allowances $110,704 $96,704 $162,700

4: Who Administers What?

401
In this section of the report we discuss the people and agencies involved in financially supporting MPs and Ministers – both in setting and paying remuneration, and in providing support resources or reimbursing expenses. Figure 4 on page 27 illustrates the position.

Figure 4
Entitlements – Who Sets Them and Who Pays Them

Entitlements Who Sets Them? Who Pays Them?
HSC Speaker Minister of
Ministerial
Services		 Parliamen-
tary Service		 Ministerial
Services
Salary x

x x
Employer Superannuation Contribution x

x x
Basic Expenses Allowance x

x x
Office[-holder] Expense Allowance x

x x
Constituency Allowance x

x
House Allowance x

x x
House and Grounds Maintenance Allowance x

x x
Motor Vehicle Purchase Allowance x

x
Security System Purchase Allowance x

x
Wellington Accommodation Allowance x

x
Day Allowance x

x
Night Allowance x

x
Travelling Allowance x


x
Car Reimbursement x

x
Travel – domestic: air/rail/bus
x x x x
Travel – international: air
x x x x
Communications facilities
x x x x
Self-drive car
x x x x
VIP transport

x
x
Ministerial residence

x
x
VIP Travel Clubs
x x x x

402
The relationships between the various parties include the following activities:

  • developing rules about entitlements;
  • establishing MPs’ and Ministers’ eligibility to entitlements;
  • administering the systems for paying salaries and other entitlements (including reimbursing actual and reasonable expenses); and
  • providing ongoing advice to MPs and Ministers about their entitlements in the event of changes in their personal circumstances.

Roles and Responsibilities

Higher Salaries Commission

403
Under the Civil List Act 1979, the HSC promulgates yearly Determinations that set out MPs’ salaries16 and a number of allowances, and the circumstances in which they can be claimed. The HSC also sets levels of superannuation subsidy provided by the Parliamentary Service to MPs who are not members of the Government Superannuation Fund.

404
The HSC’s statutory role is limited to fixing levels of salaries and allowances according to prescribed statutory criteria, and to publishing its Determinations. However, in practice it also provides advice to MPs and Ministers regarding their allowances – either directly or through the Parliamentary Service or Ministerial Services.

The Speaker

405
The Speaker:

  • is the ‘Vote Minister’ (under the Public Finance Act 1989) for Vote Parliamentary Service;
  • is the ‘Responsible Minister’ for the Parliamentary Service; and
  • sets the amounts, terms, and conditions of the entitlements referred to in paragraph 313 (funding for which is appropriated in Vote Parliamentary Service).

The Minister Responsible for Ministerial Services

406
The Minister Responsible for Ministerial Services:

  • is the ‘Vote Minister’ (under the Public Finance Act 1989) for Vote Ministerial Services; and
  • sets the amounts, terms, and conditions of the entitlements referred to in paragraph 315 (funding for which is appropriated in Vote Ministerial Services).

Parliamentary Service Commission

407
The statutory functions of the PSC under the Parliamentary Service Act 2000 are:

  • to advise the Speaker on –
    • the nature of the services to be provided to the House of Representatives and to members of Parliament; and
    • the objectives to be achieved by providing those services; and
  • to recommend to the Speaker the adoption of criteria governing funding entitlements for parliamentary purposes.17

408
The Speaker must also establish, at least once during the term of each Parliament, a committee of independent persons to review the budgets for administrative and support services provided to the House of Representatives and MPs, and funding entitlements for parliamentary purposes.18

Department of Internal Affairs (Ministerial Services)

409
DIA administers Vote Ministerial Services. In so doing, it administers – through Ministerial Services – some specific entitlements for Ministers that have arisen through longstanding practice.

410
Ministerial Services exists separately from the Parliamentary Service, in recognition of the constitutional separation between the roles of MPs and Ministers of the Crown.

411
Ministerial Services:

  • notifies Ministers of the HSC’s Determinations of salaries and allowances;
  • pays Ministers their salaries fortnightly;
  • provides the additional entitlements to Ministers and members of the Executive described in paragraphs 315 and 316; and
  • administers the processes for Ministers claiming allowances determined by the HSC and for paying those allowances.

The Parliamentary Service

412
The Parliamentary Service is a statutory body established under the Parliamentary Service Act 2000. Its role is to provide administrative and support services to MPs.

413
The Parliamentary Service:

  • notifies MPs of the HSC’s Determinations of salaries and allowances;
  • pays MPs their salaries fortnightly;
  • provides the additional entitlements to MPs described in paragraphs 313-314 and 316;19
  • administers the processes for MPs claiming allowances determined by the HSC and for paying those allowances; and
  • administers the arrangements for MPs’ superannuation.

414
In special circumstances the Parliamentary Service can also pay allowances to Ministers. For example, if a Minister does not either have their own home in Wellington or occupy a Ministerial residence, they could claim a Wellington Accommodation Allowance to assist them to meet costs of renting accommodation in Wellington.

5: Previous Consideration of the Issue

Concerns Raised in Our Interim Report

501
In our Interim Report on the administration of MPs’ allowances and Ministerial housing entitlements, we concluded that there is a lack of ownership of the whole regime. Responsibility is disjointed – with the HSC, Ministerial Services, and the Parliamentary Service being predominantly concerned with their own specific roles.

502
This situation, coupled with a complex set of legal entitlements and an over-reliance on trust in defining eligibility, gives rise to a weak financial control environment.

503
The generic and specific concerns we have with the administration of allowances and other entitlements are as follows.

Generic Concerns

504
Our generic concerns are that:

  • no single agency is responsible for the regime as a whole;
  • there is a lack of sound systems for the provision and documentation of advice on allowances and entitlements;
  • the regime is complex and potentially confusing; and
  • the residential requirements for MPs’ allowances are unclear and difficult to apply.

Specific Concerns

505
Our specific concerns are that:

  • the nature of the internal control systems over MPs’ and Ministers’ discretionary expenditure and allowances is inherently weak, with significant reliance placed on individual trust;
  • the extent of communication between the agencies involved in the entitlements regime is variable; and
  • application of the policy of reimbursement of “actual and reasonable” expenses is difficult.

506
We consider that these circumstances potentially could either:

  • give rise to unwitting actions by MPs that are inconsistent with the intent of the allowances and entitlements regime; or
  • contribute to actual abuse of the regime.

The Rodger Report

507
The issues that we have identified in the course of our review are not recent phenomena. Some of them were identified during the review of the Parliamentary Service Act 1985. That review was initiated by the PSC in 1998, following recognition that the role and functions of the PSC should be reconsidered in order to reflect developments in public sector accountabilities since the PSC’s establishment. The terms of reference for the review are attached as Appendix 3 on pages 79-81.

508
The 1998 Review Team (the Review Team) consisted of:

  • Hon Stan Rodger CMG – a former MP and Minister;
  • Mr Rex McArley – a business executive and former member of the HSC; and
  • Adrienne von Tunzelmann – a public sector consultant with previous experience in senior positions in the Office of the Clerk, the Treasury, and the Department of Justice.

509
The Review Team reported its findings and recommendations in February 1999, in the Report of the Review Team on A Review of the Parliamentary Service Act to the Parliamentary Service Commission (the Rodger Report).

Key Principle for Administration of MPs’ Salaries and Allowances

510
The Rodger Report noted that consideration needed to be given to the process by which payments to individual members was made and how the policy behind such payments was set. In respect of the Parliamentary Service, HSC, and Ministerial Services – and their involvement in the regime – the Rodger Report noted that the lines of responsibility and function had become “quite blurred, with the possibility of confusion over whose jurisdiction prevails”.

511
The general principle of relevance to the entitlements regime recommended in the Rodger Report was that:

Matters to do with the remunerastion of members, including benefits and allowances and personal expenses, be entirely in the hands of the Higher Salaries Commission to determine; while the determination of support services be entirely in the hands of the Speaker in consultation with the Parliamentary Service Commission and with advice from the Parliamentary Service.

512
The Rodger Report noted that amendments to the Higher Salaries Commission Act (primarily section 12 which deals with the HSC’s role in respect of MPs) and the Civil List Act (to ensure consistency) would be required to implement this principle.

513
The Rodger Report also noted that Ministers’ allowances may need attention but (as the issue was outside the terms of reference of the review) it was not addressed further.

Overall Recommendations of the Rodger Report

514
In addition to the recommendation of relevance (paragraph 511 above), the Rodger Report recommended that:

  • the Parliamentary Service Act 1985 should be rewritten to take account of MMP and financial accountability changes, and to redraw the relationship between the PSC and the Parliamentary Service;
  • there should be a three-yearly, independent review of the resourcing of members’ support, to recommend a dollar benchmark for each Parliament;
  • the method of funding members’ support should place responsibility for budget management with those who in practice spend the money (the review team favoured a system of bulk funding to achieve this); and
  • the Official Information Act 1982 should apply to the Parliamentary Service.

515
The Rodger Report commented on the prospective issue of tax treatment of allowances – noting that allowances had gradually come to be seen as additional payments over and above income to meet expenses (i.e. reimbursement of expenses).

516
At the time the Rodger Report was written, the IRD was undertaking a review of the tax status of office-holder allowances across the board. This review included allowances paid to MPs and other office-holder categories within the HSC’s jurisdiction, and led to a legislative change treating certain office holders (including MPs) as if they were employees (and therefore liable to pay PAYE).

Response to the Rodger Report

517
The Rodger Report resulted in the Parliamentary Service Act 2000, which addressed two of the recommendations made:

  • the need to redraw the relationship between the PSC and the Parliamentary Service, having regard to MMP and financial accountability changes; and
  • providing for the triennial independent review of the resourcing of MPs support, to recommend a dollar benchmark for each Parliament (see paragraph 514 on page 33 – the first review is yet to occur).

518
The issues that were not addressed in the Parliamentary Service Act 2000 included:

  • reviewing the system for funding MPs’ support in order to place the responsibility for budget management in the hands of those who, in practice, spend the money (bulk funding being the preferred option);
  • achieving a clear separation between the HSC and its responsibility for all aspects of MP remuneration, and the Speaker of the House’s responsibility for the determination of entitlements and support services for MPs; and
  • the application of the Official Information Act 1982 to the Parliamentary Service.

6: What Does All That Mean?

601
To make sense of the complexity of what and by whom an MP is paid, we have turned our attention to how anyone else’s remuneration and job-related expense payments would be determined and treated under the law.

Framework for Analysis

602
In considering anyone’s pay, allowances and other job-related entitlements it is essential to differentiate between:

  • remuneration; and
  • expenses.

What Is Remuneration?

603
The term “remuneration” needs some explanation. Given that remuneration may be taxable income, it is useful first to consider what payments and benefits may form components of a professional and full time employee’s remuneration according to the Inland Revenue Department (IRD):

  • salary and wages (including taxable allowances and overtime);
  • extra emolument payments;
  • withholding payments;
  • payments for a specified office holder;
  • interest and dividends for a major shareholder-employee;
  • use of a motor vehicle;
  • low interest or interest-free loans;
  • subsidised or discounted goods or services; and
  • employer contributions to health and accident insurance policies or superannuation.

604
The State Services Commission uses the following definition:

  • base salary;
  • cash allowances (including fees and subscriptions);
  • bonuses and incentive payments;
  • non-monetary benefits (including superannuation, motor vehicle, medical insurance, and home telephones);
  • any fringe benefit tax (FBT) paid on an element of the remuneration package; and
  • any termination, severance or end-of-contract payments.

605
It is common practice to calculate the value of an individual’s employment package using this “total remuneration” approach.

What Are Expenses?

606
As already indicated, expenses are costs incurred that are directly related to the performance by an employee of the functions and duties of the employee’s job.

607
A person who is an employee can expect that their employer will adopt one or more of the following courses:

  • Meet, as an expense of the business, the cost of the travel or equipment needed to support the employee in doing their job – either by prior payment or subsequent reimbursement on an actual and reasonable basis. In this case the payment to the employee is unlikely to be taxable, because the employee has not gained a personal benefit from the reimbursement.
  • Give the employee an allowance to cover the expected cost to him/herself, without any requirement to account for how he or she actually spends the allowance. In this case the payment to the employee may form part of the employee’s total remuneration and be taxable (see paragraphs 709-712).
  • Meet all or part of the cost by a combination of those two courses.

608
A person who is self-employed is entitled to deduct the cost of the travel or equipment needed to support them in doing their job, from the income gained from the activity. But the nature of selfemployment is such that the individual may derive some personal benefit from the expenditure as well.

Is a Distinction Between Remuneration and Expenses Necessary?

609
An MP’s job has some specific peculiarities:

  • it combines elements of public office, public service, and professional occupation; however
  • there is no prior vocational requirement or occupational qualification to become an MP;
  • there is no progression for MPs in their remuneration to reflect greater experience and skill;
  • there is no formal system of performance measurement for Parliament as an institution;20 and
  • there is exceptional variety in an MP’s day–to–day work in terms of both tasks (complex to basic) and the magnitude of issues the MP deals with (from high to low).

610
Other characteristics of an MP’s job are that:

  • While MPs are employees for tax purposes they are not “employed” (i.e. they are not employees of a specific organisation), even though they work as part of a large organisation (Parliament) and draw on the resources of that organisation to do their job. But neither are they selfemployed and able to enjoy the autonomy which a selfemployed person has over his or her business income.
  • The job has elements of compulsion (for example, the need to attend sittings of Parliament, and to be subject to party discipline), yet in other respects MPs have a constitutional autonomy and independence to act as their conscience (or, if they choose, the will of their electors) dictates.
  • The job can be all-consuming – meaning that what little personal time MPs have must sometimes be spent while they are away from home on Parliamentary business.
  • The job requires many MPs to have more than one place of residence and divide their time between the two – with or without their spouses or family members.

611
The public service aspects of the role of an MP have been an overriding influence on the public’s expectation in regard to MPs’ pay. These issues have tended to make it difficult to establish a “market rate” for an MP’s pay. And, of course, there has always been debate about whether (and, if so, what) MPs should be paid, given the nature of their role.

612
The regime of MPs’ salaries, allowances and other entitlements has, therefore, evolved to take into account:

  • both the nature of an MP’s occupation; and
  • the public’s expectation that MPs should not be paid “more than they should be” for a public service.

613
These factors have resulted in a system of salaries, allowances and entitlements for MPs that blurs the distinction between the normal forms of remuneration and expense. In some respects the distinction is clear – for example, an MP’s salary (which is clearly remuneration) and the reimbursement of expenses incurred through an MP using their private car for parliamentary business.

614
In other cases the distinction is not clear – for example, an MP may receive a basic expenses allowance to cover some jobrelated expenses. However, the payment of this allowance does not rely on receipts (or other evidence of the expenses being incurred) being produced. If it transpires that the amount of basic expenses allowance paid exceeds the actual expenses incurred, the excess would normally be considered as remuneration.

615
This lack of distinction between expenses and remuneration is one of the main sources of public confusion and disquiet about MPs’ remuneration.

Comment

616
The fairness of an employee being appropriately remunerated for their job, and being reimbursed for necessary job-related costs they have to incur, cannot be denied. We can see no reason, therefore, why this understanding should not be applied to the regime for the remuneration and support of MPs.

617
An MP is neither an employee nor self-employed. But, in the most fundamental sense, an MP is no different from other persons in employment in that he or she needs support resources and incurs expenses in doing the job of an MP. In regard to these resources and expenses, we cannot add to the principle first espoused in relation to the British House of Commons, that:

… a Member should be able to draw on public funds, or be reimbursed from them, for those essentials he needs to do his job properly.21

618
Clearly identifying remuneration and expenses would have two implications for the way that MPs’ salaries, allowances and other entitlements are currently set and administered:

  • it would increase the transparency of the regime for the public – in that the underlying basis for MPs’ remuneration would more closely reflect the reality that an MP is engaged in a full-time professional occupation; and
  • it would provide a clearer basis on which the tax status of MPs’ and Ministers’ remuneration could be determined.

7: What Do We Think About the Current Situation?

Overall View

701
When we apply our framework for analysis to the regime for MPs’ and Ministers’ salaries, allowances and other entitlements, the main observation to be made is the general lack of transparency – illustrated by:

  • the variety of agencies involved and the parallel nature of their roles and responsibilities;
  • the lack of clarity about the nature of the allowances and other entitlements payable (i.e. are they remuneration or reimbursement of expenses?); and
  • the potential for some of the allowances and entitlements to be taxable income.

Parallel Roles Lead to Confusion of Purpose

702
The need for an independent body to establish salaries and allowances for MPs and Ministers has been recognised, and addressed previously, through the establishment of the HSC.

703
However, it appears that the Speaker of the House and the Minister Responsible for Ministerial Services each has a role that is similar to that carried out by the HSC. This is because, as the Ministers responsible for Vote Parliamentary Service and Vote Ministerial Services (respectively), they make decisions regarding the entitlements funded through these votes for MPs and Ministers – which can provide a personal benefit to the recipient.

Remuneration or Reimbursement of Expenses?

704
We have already addressed in Chapter 6 the meaning of (and the differences between) “remuneration” and “expenses”. If one considers the nature of the entitlements payable in that context the following becomes clear.

HSC-determined Allowances

705
The allowances determined by the HSC are intended as reimbursement of expenses, but it could be argued that some of them might in fact have a remuneration component – especially allowances that do not rely on a receipt being furnished to the administering agency before the allowance is paid. A good example is the Basic Expense Allowance (see Figure 2 on page 24 and paragraph 615).

706
When we came to apply our understanding of the distinction between remuneration and expenses we found that the ‘reimbursing allowances’ set out in the HSC’s 2000 Determination fell into two broad categories:

  • Allowances to reimburse expected expenses – These are allowances that are paid to MPs and Ministers (regularly along with their usual salary payments) to meet expenses that are expected to be incurred by them as a result of their job. They are not taxed at source. The payment of these allowances does not rely on the MP or Minister producing proof (a receipt) of having incurred a corresponding jobrelated expense.
  • Allowances to reimburse actual and reasonable expenses incurred – These are types of expense that, if incurred by an MP or Minister as a result of their official or Parliamentary duties, can be reimbursed on provision of a receipt (or other evidence of the expense being incurred).

707
Figure 5 on page 42 describes the allowances in both categories. Further details of the nature and amounts of allowances payable to MPs and members of the Executive under the HSC’s 2000 Determination are given in Appendix 2 on pages 76-78.

Figure 5
Types of Reimbursing Allowances

Allowances to reimburse expected expenses Allowances to reimburse actual and reasonable expenses (on proof of expense being incurred)
Basic expenses allowance
Differing levels paid to MPs and Ministers.		 Travelling allowance
Reimbursement to a pre-set level for accommodation costs incurred by a member of the Executive.
Office[-holder] expense allowance
Differing levels paid to the Speaker, Deputy Speaker or Assistant Speaker of the House of Representatives.		 Night allowance
Reimbursement to a pre-set level available for MPs staying overnight over 100 km from their primary place of residence.
Constituency allowance
Not paid to Leader of the Opposition, members of the Executive, the Speaker, and the Deputy Speaker.		 Wellington accommodation allowance
Reimbursement to a pre-set level for MPs incurring accommodation costs in Wellington.
House allowance
Paid to members of the Executive and (if he or she resides in the Wellington Commuting Area) the Leader of the Opposition.		 Car reimbursement
Reimbursement for costs incurred by an MP in using their private car for work purposes.
House and grounds maintenance allowance
Paid to members of the Executive and (if he or she resides in the Wellington Commuting Area) the Leader of the Opposition.		 Security system allowance
Reimbursement to a pre-set level of costs for installing a security system, and ongoing monitoring.
Day allowance
Payable to all MPs [not members of the Executive] when they are away from their primary place of residence, outside their electorate, and engaged on Parliamentary business.		 Allowance for purchase of a motor vehicle
Payable to Constituency MPs, but offset against their Constituency Allowance.

Other Entitlements

708
The specific entitlements provided to MPs and Ministers by the Parliamentary Service and Ministerial Services emerge from longstanding practice. Some of the entitlements would be considered components of remuneration if provided to an employee in any institution other than Parliament.

Possible Taxation Issues

709
Where an allowance or other entitlement could be considered to be remuneration or have a remuneration component, the issue arises of whether it is taxable. Of relevance is that MPs are “employees” for the purpose of the Income Tax Act 1994.

710
In respect of allowances, section CB 12 of the Income Tax Act makes certain allowances tax-free when paid to employees. Section CB 12 applies what is essentially a “two-stage” test for the exemption. In particular:

  • The allowance must reimburse the employee. In other words, the employee must have incurred the expenditure that is being reimbursed. However, this may be subject to an “averaging provision” (see paragraph 711 below).
  • The expenditure incurred by the employee must have a sufficient connection with the earning of employment income. Broadly, the employee must be able to show that the expenditure was incurred in the course of earning employment income. This is a question of fact and degree.

711
The “averaging” provision referred to above works in the following manner. Rather than an employer reimbursing an employee’s actual expenditure, the employer can determine an average amount likely to be incurred by an employee or group of employees and reimburse on that basis. The average amount is then tax-free. 22

712
To the extent that an allowance is not matched by legitimate jobrelated expenses, the allowance would constitute taxable income. Some MPs and Ministers may well incur legitimate jobrelated expenses up to or in excess of an allowance they receive – in which case, none of the allowance would be taxable income. Others may incur expenses that are less than the allowance they receive – in which case, the difference between the allowance paid and expenses incurred would be taxable income.

Conclusion

713
The lack of ownership and blurred roles and responsibilities of key agencies involved in the entitlements regime are clear. The problem has been recognised before – both in the Rodger report and in our Interim Report. Indeed, in our view if the recommendations of the Rodger Report had been implemented the problem of lack of ownership and blurred roles would have been largely addressed.

714
We conclude that the best way forward is to restructure the regime of salaries, allowances and other entitlements so that remuneration and expenses are clearly identified and treated in a similar manner to those of “normal” employees.

715
We set out our suggestions for how the entitlements regime could be improved in Chapter 8 on pages 45-55 following.

8:How the Entitlements Regime Could Be Improved

801
Given the issues we have considered elsewhere in this report and in our Interim Report, it is clear that the systems, policies, and procedures for the determination and administration of MPs’ salaries, allowances and other entitlements need to be improved. However, principles need to be identified to ensure that the improvement process is well directed.

802
We have developed a set of guiding principles based on our analysis of:

  • generally accepted practice in relation to remuneration and the taxing of personal income;
  • the current systems, policies, and procedures applying to such expenditure;
  • the nature of current MP remuneration and expenses; and
  • reports on previous considerations of the issue of MPs’ remuneration and related payments.

Principles to Guide Improvement

803
Our five suggested guiding principles are:

  1. A clear distinction should be established between remuneration and expense reimbursement. The basis for this separation should be a definition of remuneration that is consistent with current best practice and taxation law.
  2. An independent body should determine, on the basis of clearly articulated principles, all remuneration and expenses to be reimbursed.
  3. Designated agencies should be responsible for paying remuneration and reimbursing expenses.
  4. All remuneration should be taxed on the same basis as that of an ordinary employee.
  5. The independent body referred to in (b.) above should have overall “ownership” of the system for setting and paying remuneration (as defined) by:
    • objectively determining the basis of actual and reasonable expenses that can be incurred;
    • making all eligibility decisions; and
    • formulating appropriate rules and guidance and issuing them to the designated paying agencies.

804
In developing these guiding principles, we have also had to consider their limitations. For example, we considered whether the principles would address the difficulties we identified in relation to the application of the term “primary place of residence” to MPs’ residential circumstances. We do not think the principles (of themselves) will address this difficult issue.

805
However, we have considered how the risk inherent in this definition can be minimised through other means, and our findings in this regard are dealt with in Part Two of this report (see pages 56-65).

Three Suggested Options

806
In this section we look at three options that would improve the current systems, policies, and procedures for setting and administering MPs’ and Ministers’ remuneration and expenses reimbursed:

  1. strengthening the internal controls in the current system;
  2. clarifying “ownership” of the current system, as well as strengthening internal controls; and
  3. a “first principles” approach, which would involve –
    • reviewing the current guidelines for the setting of remuneration;
    • clarifying the roles and responsibilities of administering agencies; and
    • strengthening the current systems, policies and procedures.

807
In evaluating the merits of the three options we considered the extent to which each was consistent with the guiding principles that we suggest in paragraph 803.

Option 1: Strengthening the Internal Controls in the Current Regime

808
Option 1 would involve improving:

  • the current control environment of the administration of HSC-determined allowances that are payable to MPs and Ministers by the Parliamentary Service and Ministerial Services;
  • the advisory and information transfer processes within and between organisations, and between the organisations and their MP and Ministerial clients; and
  • the transparency of the entitlements provided by the Parliamentary Service and Ministerial Services.

809
A number of measures could be introduced to:

  • clarify the policies regarding allowances and entitlements;
  • increase the transparency of the payment system;
  • increase the accessibility and quality of the information available to MPs and Ministers to assist them to clarify their eligibility for allowances;
  • advise MPs and Ministers of their responsibilities in providing appropriate information to justify entitlements and claiming reimbursement of expenses incurred; and
  • assist key personnel involved in the processes for claiming, certifying, and paying entitlements to carry out their roles more effectively.

810
Such measures could include, as a minimum:

  • Annual public disclosure of the nature and extent of publicly funded entitlements for MPs and their spouses, nominees and dependants. This disclosure could include, for example, the types and total amounts of HSC-determined allowances claimed, and the nature and extent of air travel used.
  • Provision of more comprehensive information on entitlements in both the Parliamentary Service Members’ Handbook of Services and the Ministerial Services Ministerial Office Handbook.
  • Promulgating to MPs and Ministers precedent-setting decisions about the circumstances in which claims to entitlements can be made. The provision of appropriately “depersonalised advice” on such issues would be an effective means of alerting claimants to matters that could affect their eligibility.
  • Providing more comprehensive guidance to Whips to make it clear what their obligations are in certifying reimbursement claims.
  • Providing better guidance to MPs and Whips to strengthen the process for defining eligibility to, and certifying claims to, the night allowance (when claimed to cover the costs of accommodation over 100km from an MP’s primary place of residence).
  • Utilising intranet applications to facilitate access to information on the systems, relevant policies, and appropriate procedures for claiming entitlements.
  • Improving internal processing of claims for allowances – including documenting the advice provided by the Parliamentary Service and Ministerial Services to MPs and Ministers in response to enquiries about eligibility or other claim-related queries.
  • Developing a self-review function within both the Parliamentary Service and Ministerial Services. We understand that DIA operates an internal audit function generally over all its activities. The Parliamentary Service is currently considering how it will approach this.
  • Consideration could also be given to requiring receipts (or other proof that expenditure has been incurred) for all allowances that at present do not require to be substantiated by receipts. This would require input from the HSC. However, requiring receipts would be likely to incur a high compliance cost.

811
We note that the Parliamentary Service is effecting improvement in the following areas:

  • Encouraging MPs and Ministers to tell the relevant administering agencies at the time when their residential circumstances change.
  • Using better claim forms in both the Parliamentary Service and Ministerial Services – particularly in respect of the declaration MPs and Ministers make as to their eligibility to claim reimbursement of expenses.
  • Giving information to MPs and Ministers on their allowance claim histories at any given time, in terms of –
    • what types of reimbursement they have claimed;
    • the level of claims made; and
    • for claims with a 6-month maximum time limit, the amounts that they can still claim in any particular period.

812
The measures described in paragraphs 810 and 811 do not necessitate changes to legislation. The implications of the Privacy Act 1993 may need to be considered should information need to be transferred between administering agencies. However, we do not see the Privacy Act as posing a significant obstacle.

To What Extent Is Option 1 Consistent with Our Suggested Principles?

813
Option 1 would improve the internal control environment by leading to more informed MPs and Ministers, and tighter monitoring of claims.

814
However, it would not change the regime so as to meet any of our five suggested principles in paragraph 803. As a result, the matters of the lack of an authoritative body to oversee and provide legal guidance on eligibility issues, the lack of clarity regarding the tax status of certain entitlements, and the relative complexity of the remuneration system, would remain.

Option 2: Clarifying “Ownership” of the Current Regime, As Well As Strengthening Internal Controls

815
In option 2, the controls over the entitlements regime would be strengthened – as in option 1 outlined above. In addition, the role of the HSC would be clarified – giving it the legislative mandate to oversee the effectiveness of the systems for administering its Determinations.

816
The HSC would be empowered to issue rules and guidance as to how the administering agencies should apply its Determinations in any specific circumstance. Consideration could be given to providing the HSC with power to conduct audits of aspects of the regime as required, and to make appropriate recommendations as to system improvements.

817
If option 2 is adopted, careful consideration would need to be given to any overlap with roles or responsibilities already held by the Speaker, the Minister for Ministerial Services, the PSC, and DIA.

818
Option 2 would require legislative change to clarify the role of the HSC. There may also be resource implications for the HSC, which currently operates with only a low level of administrative support.

To What Extent Is Option 2 Consistent with Our Suggested Principles?

819
Strengthening the controls over entitlements, and clarifying the HSC’s role as the body responsible for the overall “health and welfare” of the systems for administering HSC-approved allowances, would address the “lack of ownership” and the “eligibility” issues highlighted in our suggested principles in paragraph 803.

820
However, option 2 would not result in an independent body overseeing all aspects of MP and Ministerial remuneration – including the entitlements administered by the Parliamentary Service and Ministerial Services. Option 2 would also not address the overall complexity of the entitlements regime (with its blurred roles and responsibilities) and the lack of distinction between remuneration and expenses.

Option 3: “First Principles”

821
Option 3 would entail the HSC:

  • being given the mandate and responsibility for setting MP and Ministerial remuneration, including entitlements and privileges currently administered by the Parliamentary Service and Ministerial Services;
  • setting the basis for reimbursements that MPs and Ministers could claim for expenses; and
  • considering whether the range and nature of entitlements that are not based on “actual and reasonable” expenditure continue to be appropriate.

822
The HSC would continue with its existing mandate of developing appropriate principles for setting remuneration – based on generally accepted practice in the public and private sectors. In so doing, the HSC would continue to set remuneration in the context of the principles of “transparency” and “appropriateness” that always accompany expenditure of public money.

823
Option 3 would facilitate a move away from the current, and relatively opaque, approach to setting remuneration – whereby flat salary rates apply to MPs, and tax-free allowances effectively address the variance in expenses that arises due to the differing roles between MPs. A similar issue in respect of Ministers would also be avoided.

824
In respect of remuneration and taxation issues, option 3 would require consultation between the HSC and the IRD.

825
Moving from the current “salary plus allowances” approach to more like a “total remuneration” approach (as discussed in paragraphs 603-605) would require some consideration of what would be appropriate levels of total (gross) remuneration. By way of illustration, based on the current mix of salary and allowances (as outlined in Figure 3 on page 25), total remuneration would fall into the ranges shown in Figure 6 on page 52.

Figure 6
The “Total Remuneration” Approach


 Taxable Income
Lower Level (1) Upper Level (2)
Constituency MP $85,000 $127,137
List MP $85,000 $104,186
Minister $149,200 $171,331

Notes –
(1) Salary only (as in Figure 3 on page 25).
(2) Salary plus allowances (as in Figure 3 on page 25), the latter assuming that no expenses are incurred. The allowances are therefore treated as taxable income and have accordingly been ‘grossed up’ at the top marginal tax rate of 39%. It is unlikely that many (if any) MPs would be in this situation. We have not considered the value of superannuation and other entitlements in this scenario.

826
We consider that Figure 6 is illustrative of the range of taxable remuneration that might be considered in moving from a “salary plus allowances” approach to a “total remuneration” approach.

827
Option 3 would mean clarifying the roles of the Parliamentary Service and Ministerial Services to ensure that they had full responsibility for:

  • administering expenses reimbursement;
  • paying MPs’ and Ministers’ salaries; and
  • making available such other remuneration related benefits as are determined by the HSC.

828
The control environment within the Parliamentary Service and Ministerial Services would still be strengthened in the context of the new roles of the HSC and the agencies themselves.

829
Option 3 would require amendments to the Higher Salaries Commission Act (primarily section 12 which deals with the HSC’s role in respect of MPs, and section 12A which limits nonsalary types of remuneration), and the Civil List Act (to ensure consistency).

To What Extent Is Option 3 Consistent with Our Suggested Principles?

830
Option 3 would give full effect to our five suggested principles in paragraph 803. The diagram in Figure 7 below demonstrates the organisational effect of option 3, and Figure 8 on page 54 shows how the current entitlements might be reclassified into “remuneration” and “expenses reimbursed”.

Figure 7
Organisational Effect of Option 3

Figure 7.

Figure 8
Entitlements – Remuneration or Expenses Reimbursed?

Entitlements Remuneration Expenses
Salary x
Employer Superannuation Contribution x*
Basic Expenses Allowance x*
Office[-holder] Expense Allowance (a) x*
Constituency Allowance (b) x*
House Allowance (a) x*
House and Grounds Maintenance Allowance (a) x*
Motor Vehicle Purchase Allowance (c)
x
Security System Purchase Allowance
x
Wellington Accommodation Allowance
x
Day Allowance x*
Night Allowance
x
Travelling Allowance
x
Car Reimbursement
x
Travel – domestic: air/rail/bus x*
Travel – international: air x*
Communications facilities x*
Self-drive car x*
VIP transport x*
Ministerial residence x*
VIP Travel Clubs x*

* Remuneration component of the entitlement.

Concluding Comment

831
Our review of MPs’ and Ministers’ entitlements was initiated by concerns about what appeared to be a discrete aspect of the entitlements regime – accommodation allowances for MPs living in Wellington who are not ordinarily resident there.

832
However, the problems we have identified in relation to the setting and administration of MPs’ salaries, allowances and other entitlements are fundamental. Addressing the discrete issue of whether an MP can claim an allowance to live in Wellington cannot solve these problems.

833
A more comprehensive approach to MPs’ remuneration and expenses needs to be taken – in order that:

  • the policies, systems, and procedures applying to this expenditure are soundly based, transparent, effective, and efficient; and
  • they are clearly seen to be so by the public.

834
Regardless of what option (or combination of options) is ultimately adopted, we believe it is important that one agency is responsible for determining the correct tax treatment of allowances and other entitlements. This would necessitate clarification of the obligations under tax law of both MPs and the administering agencies – and might involve the engagement of tax advisers and consultation with the IRD.

835
The principles we have suggested in paragraph 803, and our observations of what improvements could be made, can form a starting point for such an approach.

1: Base information from Parliamentary Service web site: www.ps.parliament.govt.nz

2: Base information from the Cabinet Manual, Cabinet Office web site: www.dpmc.govt.nz/cabinet/

3: ibid.

4: von Tunzelmann, Adrienne (1985), Membership of the New Zealand Parliament – A study of conditions 1854-1978.

5: ibid.

6: NSW Parliamentary Library (1966), Payment of members in New South Wales – Pros and Cons from 1912.

7: Report of Royal Commission Upon Parliamentary Salaries and Allowances 1951.

8: ibid.

9: Report of the Royal Commission Upon Parliamentary Salaries and Allowances 1973.

10: Section 18, Higher Salaries Commission Act 1977. These criteria apply regardless of who is the subject of the particular determination.

11: Parliamentary Salaries and Allowances Determination 1990 (Explanatory Memorandum).

12: Higher Salaries Commission Act 1977, section 12A(1).

13: Members Handbook of Services, Parliamentary Service 2001.

14: Ministerial Services Handbook.

15: This is a conservative assessment based on the day allowance being claimed for days on which Parliament sits (84 sitting days are proposed for 2001). When the House is not sitting, the day allowance can still be claimed if an MP is on Parliamentary business.

16: The HSC only has power to determine salary, superannuation subsidy and allowances for MPs – see Higher Salaries Commission Act 1977, section 12.

17: Parliamentary Service Act 2000, section 14. The Parliamentary Service Act 2000 replaced the Parliamentary Service Act 1985.

18: ibid, sections 20-22.410.

19: These entitlements are fixed by the Speaker.

20: See Hazell "Can we reform the constitution without reforming Parliament?" Australasian Study of Parliament Group 2001, pages 14 – 18.

21: von Tunzelmann op. cit.

22: The IRD has published information on how the "average" is to be arrived at – Tax Information Bulletin Volume 11 No. 6, July 1999. The information discusses the general principles without providing a mathematical example.

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