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Tax Working Group – Where to from here?

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In reality, we did not expect a broad-based capital gains tax (CGT) to be implemented. Instead, we expected the coalition to negotiate a politically acceptable ‘package’. But we did not expect the announcement on April 17, that there would be no CGT at all. It would have been interesting to have been a fly on that wall.

A decade of campaigning, election commitments and an 18-month review of the New Zealand tax system, yet it failed at the final hurdle due to a lack of consensus. Jacinda Ardern was unable to implement a CGT, even though she believed it to be a fairer and more equitable method of taxation. Such is the power (or lack thereof) of a mixed member Parliament. No CGT this electoral term, or the next, or under the leadership of Ardern. This from a prime minister who has cracked the 50 percent threshold as preferred prime minister.

Once we move past the fact there will be no CGT, where does this leave us? The TWG made 99 recommendations, only two of which related to CGT. So how have the Government responded to the remaining 97 recommendations?

Of the 97, 13 recommendations were for no changes to be made. For example, the TWG recommended that the GST rate should not change, no new GST exemptions should be introduced, the corporate tax rate should stay the same and no progressive company tax rate should be introduced. In all cases, the Government agreed with the TWG’s recommendations to make no changes.

Including the two CGT recommendations, a total of 17 TWG recommendations will not be acted on. The TWG made many recommendations around personal income tax, including changes to the marginal tax rates’ thresholds. However, with no CGT, there is no additional revenue for the Government to recycle and therefore changes to the personal income tax regime are no longer feasible.

The Government has indicated that work is already underway in relation to 30 of the TWG’s recommendations. Most of the recommendations around environmental and ecological outcomes, such as solid waste, greenhouse gases etc, are being addressed through changes to the Climate Change Response Act Amendment Bill, along with other work being done by the Ministry for the Environment. Action has also started on recommendations relating to international income tax. Consistent with the government stance on introducing a digital services tax, work is underway in relation to options for taxing the digital economy, with a draft discussion document due to go to Cabinet in May 2019. The government will also continue to work alongside other members of the OECD on the taxation of multinational corporations.

With varying degrees of priority, 61 recommendations have been referred to IRD for potential inclusion on its tax policy work programme, including some for which the recommendation has been rejected, but an alternative approach is to be considered.

Recommendations for assessment by IRD include the taxation of retirement savings, subsidiaries of Māori authorities, changes to compliance requirements of small businesses and issues around tax secrecy and tax transparency. IRD will also explore options for taxing vacant land, otherwise known as ‘land banking’. The TWG recommended adding vacant land taxes to the local government levy system.

Recommendations relating to the integrity of the tax system have been flagged as a high priority, with the government continuing to invest resources to enable IRD to enforce the existing tax regime, and take action in relation to the hidden economy. Taxation of businesses and the recommendations made by the TWG around provisional tax, compliance costs, fringe benefit tax, depreciation rates have been flagged for consideration, but no priority level has been assigned.

The Government’s response to the TWG report hints at changes in the distant future; however, these are unlikely to be revolutionary. Sometimes evaluating your circumstances doesn’t change them, but it provides a new perspective, and listening to the public and its coalition partners has likely provided the government with a new one.

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

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About Author

Hayden Farrow

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