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Tax group releases interim report

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The Tax Working Group, chaired by Sir Michael Cullen, released its much anticipated Interim Report on September 20.

The group, established by the Labour coalition, first came together in January 2018 to consider the existing tax system, and make recommendations to improve the fairness, balance and structure of the New Zealand tax framework over the next 10 years.

The 10 members of the group have diverse backgrounds, ranging from a tax law professor to an ecological economist.

The most anticipated topic has been the potential introduction of a capital gains tax. 

The group made it clear that it is still forming its views on whether to recommend the tax.

However, they included two design options – either tax realised gains or tax assets on a deemed return basis. Assets captured would include land, intangible property, income-earning assets not taxed on sale under the current system and shares in companies.

The group confirms that family homes and personal assets such as cars, boats and jewellery would be excluded. At this stage it seems likely that CGT will be introduced, subject to the outcome of the next general election.

Another key area considered by the group is encouraging lower and middle-income earners to increase their retirement savings, on the assumption that high-income earners are likely to be saving adequately.

The group suggests the creation of a package of modest incentives for retirements savings targeted at this specific demographic. This would comprise the removal of Employee Superannuation Contribution Tax (ESCT) of three percent for employees earning up to $48,000 per annum, and a five percentage point reduction for each of the lower PIE rates applying to KiwiSaver funds.

Regarding the taxation of business, the interim conclusion is to largely maintain the current company tax regime and 28 percent tax rate, including retention of the imputation credit system.

The group does not recommend the introduction of a progressive company tax, nor an alternative basis of taxation for smaller business, and instead thinks smaller businesses can be supported through simplification of the tax compliance system.

Various recommendations have been made to achieve this, such as increasing the provisional tax threshold and the $10,000 limit for automatic deduction of legal fees.

The group has gone on to consider a broad range of issues, yet has refrained from recommending changes in a variety of areas.

For example, it concludes that “unaffordable housing” is largely due to a shortage of supply over demand, such that no tax changes are suggested. Furthermore, the consultation identified public concern on the topic of international tax avoidance, particularly in relation to the current tax framework for multinational companies and digital firms.

However, the interim recommendation is to “wait and see”. The group shied away from recommending a regime that could potentially cause retaliatory action from other countries, with detriment to our export industry.

The report also considers the role of tax in environmental and ecological concerns. However, it has not recommended any corrective taxes on the basis that the Government should first establish clear goals about the undesirable behaviours any taxes should address.

The group was specifically excluded from considering an increase in the current rates of personal income tax and is still “weighing up its options” in respect of potential changes to the income tax rates and thresholds, with any recommendations expected in the final report.

Most of the group’s interim recommendations on personal income taxes are aimed at ensuring the rising number of self-employed individuals adequately comply with their tax obligations.

The group was specifically excluded from considering an increase in the GST rate.

Despite this, it received many public submissions calling for a reduction to the current 15 percent rate, on the basis it places a heavy burden on low-income earners. The group analysed the economic effects of a potential reduction, ruling it out on the basis that there are more effective ways of providing assistance to low-and-middle income families.

The removal of GST from certain products such as food and drink, on the basis that such measures would be poorly targeted was ruled out.

Although the majority of the group’s findings were as expected, it reviewed some areas of the tax system in more detail than expected. For example, it recommends retaining the 17.5 percent Maori authority tax rate, and extending it to subsidiaries of Maori authorities.

Following release of the report, Finance Minister Grant Robertson and Revenue Minister Stuart Nash immediately released a letter they had sent to the group.

They requested that the final report should include measures that result in a ‘revenue-neutral package’ – hence any tax increases will need to be offset by other measures. The views of the group as set out in the interim report are not final, and it has welcomed feedback from all New Zealanders before finalising its recommendations.

The comments in this article are of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.

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Hayden Farrow

Hayden Farrow is a PwC Executive Director based in the Waikato office. Email: hayden.d.farrow@nz.pwc.com