The Tax Working Group released its final report on February 21.
The 132-page report is the product of 13 months’ review of the current New Zealand tax system by the 11 members of the group, including a two-month public consultation, the consideration of more than 7000 submissions, and more than 25 in-person meetings.
It contains 99 recommendations for the Government, intended to improve the fairness, balance and structure of the New Zealand tax system over the next 10 years. Of the 99 recommendations, only two related to capital gains tax (CGT). The group also released a supplementary, 74-page report solely dedicated to the design of a CGT.
The recommended CGT regime, which eight of the 11 members were in favour of, will tax all land and improvements (excluding the family home), shares, intangible property and business assets. The group has recommended a “valuation day” approach, requiring taxpayers to establish a market price “as at” valuation day that forms the cost base of an asset. It recommends taxpayers have five years to determine that value, with a default rule applying after that.
Tax will apply on a realisation basis in most cases – ie, on sale of the asset. The group has recommended rollover relief in various situations such as death, relationship separations, compulsory acquisitions, natural disasters and certain business restructures. Whether rollover relief applies to situations such as where a farm is sold to buy a larger farm remains to be seen.
Controversially, the group has not recommended a separate CGT rate, and instead a capital gain would be taxed at the taxpayer’s marginal rate, with no discount or adjustment for inflation.
When reviewing the report it is clear that a considerable amount of thought has gone into it. But it is also clear the devil is in the detail. For example, because of the risk of over-investment into the family home, the group recommends consideration is given to setting a cap for the main home exclusion.
Although the topic of CGT has aroused the greatest interest from the public, it comprised only about a third of the group’s work. The group spent significant time reviewing other areas of the tax system, such as environmental and business taxes, the recommendations on which seem to have been overlooked by the media.
The group was specifically asked to consider what role the taxation system could play in delivering positive environmental and ecological outcomes. Without recommending anything too specific, it suggested a review of the emissions trading scheme, an expansion of the coverage and rates of the waste disposal levy, an advancement of congestion charging and a review of the current tax concessions relating to farming, forestry and petroleum mining with a view to remove any that are harmful to natural capital.
The report included a bunch of “no change” recommendations in relation to the taxation of business – no reduction to the current company tax rate, no removal of the imputation credit regime and no introduction of a progressive company tax rate or an alternative rate for small business. The group concluded support for smaller business would be better achieved through a reduction in compliance costs. As a result, a number of compliance savings measures were suggested for immediate action, such as an increase in the provisional tax threshold, closing stock adjustment, and automatic deduction for legal fees, and considering an expansion of the automatic deduction to other types of professional fees.
Despite the number of submitters arguing for a reduction in the GST rate or the removal of GST from certain items such as food and drink, the group did not recommend any changes to the current GST regime.
Changes to retirement savings were not significant; however, the recommendations made were intended to increase tax benefits via KiwiSaver for low and middle-income earners to encourage more savings. The recommendations include ensuring KiwiSaver members on parental leave receive the maximum tax credit regardless of contributions, increasing the member tax credit to $0.75 per $1 of contribution (retaining the current contribution cap), and a five percentage point reduction for each of the lower PIE rates applying to KiwiSaver funds.
In regards to international income tax and addressing the perceived lack of tax paid by multinationals and digital firms, the group shied away from recommending a digital services tax in fear it could potentially cause retaliatory action from other countries, with detriment to our export industry. However, since the release of the report, the Prime Minister has announced plans to implement a digital services tax, also known as the “Google and Facebook” tax.
To improve the progressivity of the personal income tax regime, the Group recommends an increase in the bottom tax bracket rather than introducing a tax-free threshold, which could be combined with an increase in the second marginal tax rate.
The Government’s full response to the report is due in April, with significant discussions expected to occur between the coalition parties during this time on what, if any, of the recommendations should be adopted. The Government’s intention is to pass legislation implementing any policy changes from the report before the end of the current parliamentary term (October 2020). This is a very ambitious and risky timeframe, and the quality of the legislation could suffer as a result. It will be critical that legislative changes are subject to the generic tax policy process to give New Zealanders the opportunity to make submissions on such significant tax reforms.
The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.