Executive Summary

Parliamentary salaries, allowances and other entitlements.

This report sets out our detailed review of the regime for setting and administering salaries, allowances and other entitlements for MPs and Ministers. As a result of our review, we now believe that the current arrangements are inadequate and in need of change.

In our view, there needs to be a more coherent and principled regime to ensure 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.

The Parties Involved

The systems for paying salaries and other entitlements to MPs and Ministers are complex, and involve:

  • the Higher Salaries Commission (HSC), which sets MPs’ and Ministers’ salaries and allowances;
  • the Speaker and the Minister for Ministerial Services, who set other entitlements for MPs and Ministers; and
  • the Parliamentary Service and the Ministerial Services branch of the Department of Internal Affairs which pay MPs’ and Ministers’ salaries, allowances and other entitlements.

What Do MPs and Ministers Receive?

Over time it has become accepted that MPs should be appropriately remunerated for their job, and should be reimbursed for expenses they incur in providing the services expected of them by the public. Reflecting that view, MPs and Ministers currently receive:

  • a salary, which differs depending on whether the recipient is an MP, or a Minister, or Leader of the Opposition, or some similar office holder;
  • a variety of allowances to reimburse actual and reasonable expenses incurred – some of which are paid on production of proof (e.g., receipts), and some which are paid without production of proof;
  • the right to use certain fully-funded facilities and services – such as telecommunications, official (VIP) transport, self-drive cars, and domestic air and rail travel; and
  • the right to discounted services – such as international air travel.

What Do We Think About the Current Regime?

A system of pay, allowances and other job-related entitlements needs to differentiate between:

  • remuneration; and
  • expenses.

We can see no reason why a conventional “remuneration and expenses” approach should not be applied to MPs and Ministers.

We base our understanding of remuneration on tax law, rules, and policies; and on criteria used by the State Services Commission. Remuneration includes, among other things:

  • salary and wages (including taxable allowances and overtime);
  • payments for a specified office holder;
  • use of a motor vehicle;
  • subsidised or discounted goods or services; and
  • employer contributions to health and accident insurance policies or superannuation.

By expenses, we mean costs incurred that are directly related to the performance of a job. In paying for an employee’s job-related expenses, an employer will normally adopt one or more of the following approaches:

  • meet the cost of whatever the employer accepts is needed to support the employee in doing their job (such as travel or equipment) – either by prior payment or subsequent reimbursement on an actual and reasonable basis;
  • give the employee an allowance to cover the expected cost to the employee of job-related expenses, without any requirement to account for how the allowance is actually spent; or
  • meet all or part of the cost by a combination of these two approaches.

In our view, the regime for MPs’ and Ministers’ salaries, allowances and other entitlements lacks transparency. This is illustrated by:

  • the number of parties involved and the parallel nature of their roles and responsibilities;
  • the lack of clarity about the nature of the allowances and other entitlements payable; and
  • the likelihood that some of the allowances and other entitlements constitute taxable income.

We assessed the administration of the current system against our “remuneration and expenses” framework and found that:

  • 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; and
  • for other entitlements, the Speaker of the House and the Minister Responsible for Ministerial Services have parallel roles to the HSC.

We considered the nature of the entitlements and found that:

  • while the allowances set by the HSC are intended to reimburse expenses, some have a remuneration component – particularly those allowances that do not rely on a receipt being produced;
  • some of the other entitlements set by the Speaker or the Minister of Ministerial Services would be considered to be part of remuneration; and
  • to the extent that allowances paid exceed expenses incurred for the same purpose, the allowance would constitute taxable income.

How the Regime Could Be Improved

We conclude that the best way forward is to restructure the framework of salaries, allowances and other entitlements so that remuneration and expenses are clearly identified and treated in a similar manner to those of any other employee.

We suggest observance of the following five guiding principles to ensure that improvements are well directed:

  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.

Options for Improving the Regime

We offer three options for improving the regime.

Option 1:
Strengthening the Internal Controls in the Current Regime

This option 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.

This option would improve the internal control environment, but it would not meet any of our suggested principles.

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

Under this option, the controls over the entitlements regime would be strengthened – as in option 1. 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.

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.

This option would address some, but not all, of our suggested principles.

Option 3:
“First Principles”

Option 3 would entail the HSC:

  • being given the mandate and responsibility for setting MPs’ and Ministers’ remuneration, including entitlements and privileges currently set by the Speaker and the Minister Responsible for Ministerial Services;
  • setting the basis for MPs’ and Ministers’ expense reimbursement; and
  • considering whether the range and nature of entitlements that are not based on actual and reasonable expenditure continue to be appropriate.

The Parliamentary Service and Ministerial Services would be responsible for paying remuneration and reimbursing expenses on an actual and reasonable basis.

This option would give full effect to our suggested principles.

Eligibility for Entitlement to Accommodation Allowances

A key issue of eligibility for certain allowances – especially the Wellington Accommodation Allowance – has been determining an MP’s “primary place of residence”. The HSC has instituted a questionnaire for applicants, which is a considerable improvement on the previous approach. We encourage the HSC to consider what other practical improvements could be made to enhance how it determines individual cases of entitlement.

In addition, there is an issue about MPs claiming for the use of private accommodation. We strongly recommend that the HSC formulates a clear policy on entitlement and clarifies what is a reasonable level of claim.

Use of Air Points

MPs’ access to “loyalty rewards” – especially air points obtained from air travel – became the subject of controversy after the Speaker decided (on the recommendation of the PSC) in March 2001 to remove the requirement for MPs to surrender, when leaving Parliament, air points obtained as a result of taxpayer-funded travel.

We reiterate the principle espoused by former Auditor-General Brian Tyler in 1994 that:

Loyalty rewards arising through the expenditure of public funds on official business represent a discount on official costs. Where they accrue to a private individual through public expenditure, they should be –

  • considered the property of the funding entity; and
  • applied as far as practicable, and in such ways, as to realise the advantage they represent for the funding entity.

The PSC subsequently revisited its policy position. In our view the new policy is an improvement on the previous approaches to the subject – recognising that there are no standard “best practice” approaches that are readily applicable to MPs.

Conclusion

In our view, the current regime for setting and administering salaries, allowances and other entitlements for MPs and Ministers is inadequate and in need of change.

We offer three possible options for change, the last of which would give full effect to our suggested principles. We acknowledge that other options are possible – some of which might be more radical than those we have described.

Regardless of how change is put into effect, we strongly recommend that the principles we have outlined be embodied in the approach taken.

Our proposals are not intended to add further administrative burden. Rather, the intention is to reduce long-term compliance cost while:

  • increasing the transparency of the current system;
  • clarifying responsibilities for setting remuneration and reimbursing expenses; and
  • ensuring consistency with current taxation law.

Whichever of our options is 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 the recipients and the administering agencies – and might involve the engagement of tax advisers and consultation with the IRD.

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