The Tax Working Group (TWG) tabled its final report on the Future of Tax sparking a media and public frenzy around capital gains tax (CGT). With all the media commentary, you could be forgiven for thinking the report was solely on a capital gains tax.
Of the 99 recommendations the TWG made, only TWO related to capital gains tax.
Seldom reported is that the TWG conducted a thorough review of New Zealand’s current tax system, and how it could look in the future.
It highlighted areas of the system that needed work as well as making business and taxpayer-friendly recommendations that could encourage savings and investment, support business and ultimately see us paying less tax.
The good news is that our tax system is in good shape. It works well, delivers adequate revenue for the government’s coffers and has relatively low compliance and collection costs.
Further it doesn’t distort economic behaviour a whole lot, except for certain areas of property.
So, it’s doing all the things a good tax system should and not many of the things it shouldn’t.
Given the introduction of a CGT is not a given, let’s look at some of TWG’s non-CGT recommendations.
Scope for changes
Business taxation – Changes to loss continuity rules to support innovative start-up firms. Allowing tax deductions for certain expenditure (blackhole) where there is currently no entitlement to claim, including seismic strengthening costs.
Compliance saving measures such as increasing the provisional tax threshold from $2500 to $5000, increasing automatic deduction for legal fees and extending this to other expenditure types.
Allowing depreciation on commercial, industrial and multi-unit residential buildings (if a CGT was introduced).
Retirement savings – No significant changes to the taxation of savings, but modest tax changes recommended via Kiwisaver to encourage saving and investment for low and middle income earners.
Measures include: increasing member tax credit, lowering PIE rates for lower income bands, and refunding Employer Superannuation Contribution Tax for low income earners.
Future of work – With the increasing trend of gig economies and transient workers contracting their services on a short-term basis, PAYE tax-take predicted to decrease in future, which could impact government tax revenue significantly.
The review suggested the use of withholding taxes and robust reporting to mitigate.
Environmental taxes – The tax system could play a role in sustaining and enhancing NZ’s natural capital.
TWG discusses what this could look like in the short, medium and long term.
And it recommends government strengthen its tax capabilities in this area and look at implementing environmentally friendly concessions while reviewing current tax concessions if they are harmful to natural capital.
Administration of tax system – The review suggests: better use of data to help inform future policy development and respond to public needs, establishing taxpayer advocacy services to help with resolution of tax disputes with IRD, and to consider simplifying the disputes process for smaller taxpayers.
Taxation of charities – The WTG supports IRD’s current review of tax treatment of charities.
It recommends considering taxing profit accumulations until they are applied to charitable purposes.
Also, examining whether there needs to be a distinction between privately controlled foundations and other charitable entities and whether greater governance required.
Leave as is
No GST changes or exemption – Submissions were received calling for the reduction/removal of GST from food, medical supplies etc.
While good in their intent, exempting GST on certain goods is inefficient from a policy perspective as there are more efficient, targeted ways of addressing this than using the tax system.
No change to top 33 percent personal tax rate – Though this is relatively low by international comparisons, the $70,000 kick-in threshold is low.
No company tax rate reduction – While our company tax rate is now slightly higher than the OECD average, at 28 percent it is still lower than Australia’s.
The WTG says there is no clear evidence that it is discouraging overseas investment.
If Australia was to lower its rate, then NZ should look at doing so also.
No adjustment of tax system for inflation – With inflation, our wages/salaries increase and we end up with more of our income being taxed in a higher tax bracket. Here we have a clear case in principle for adjusting the tax rates.
But practically it is very hard to do given there are hundreds of thresholds in the tax rules.
The review suggests government should keep an eye on and look at the current thresholds from time-to-time.
No wealth or land taxes – There were lots of submissions supporting these taxes on equality / wealth distribution grounds.
But none were found acceptable based on fairness, as many would not have the cashflow to afford an annual tax.
No GST on financial services – International experience is that it’s very hard to tax properly and the WTG was concerned the cost would be passed onto the end consumer.
Capital Gains Tax
A lot has already been said in the media about CGT and conjecture is rife. What is a fact is that if the government proceeds with its CGT journey, the road ahead is not a long one.
It’s incredibly short and fraught with political risk and danger at every turn.
NZ First holds the political key. The government will need its coalition party’s support every step of the journey.
That will run from the government’s planned announcement in April as to what TWG recommendations it will pick up and run with, through the tax policy process, to the introduction of any legislation to Parliament by October/November.
Then there is the Select Committee stage before any Bill’s third reading and enactment on July 2020. NZ First could reconsider its position at any point along the way.
The timeframe is incredibly tight – and some would say unachievable – to achieve a comprehensive CGT including the amendments required of the current legislation as it applies to the taxation of capital.
Australia took five years to design its CGT system, two-to-three years to legislate it and approximately 10 years fixing it up. Even now it is not perfect.
The government has 15 months if it is to meet its timeframe of passing it into law by July next year.
A wise person would not panic yet as nothing may eventuate. And if the government chooses to take a CGT further, it will be a different beast to what is suggested by the TWG, given it will almost inevitably have been made more politically palatable.
So keep a close eye on the coverage and debate, but wait until the government’s announcement in April before taking stock and assessing its impact.
The comments in this article are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.