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Tax policy changes taking shape

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Initial forecasts indicated a category five storm, eventually it was downgraded to a three, and by the time it made landfall it was just a typical winter’s day in Aotearoa, unpredictable, wet with some short spells of sunshine. The Government’s recent tax policy work programme (TPWP) announcement for 2019-20 is reminiscent of this analogy.

There was the potential for the Tax Working Group (TWG) to bring major changes to our tax system, but their recommendations have been either side-lined or ‘kicked for touch’ onto Inland Revenue’s TPWP. The TPWP sets out various tax policy items that are being researched by IRD officials for potential legislative change and it provides a sense of changes which may be implemented in the future. The highlights of the updated TPWP include:

Land related changes:
In the short-term, information flows between Land Information New Zealand and IRD may be streamlined to assist with compliance with the current land tax rules, such as the residential brightline test (do we interpret this as ‘policing’?). The TPWP refers to reviewing the exemptions in the land rules, particularly for developers and habitual renovators and the deductibility of holding costs for land that will be taxable on sale (e.g. rates and insurance).

In the longer term, measures to free-up the supply of residential land will also be considered, including:
• Use of property taxes as a means to discourage land banking
• Whether the current 10-year rule that applies to ‘tainted’ land is giving rise to ‘lock-in’,
Whether the bright-line test and loss ring-fencing rules are having the intended effect
• Consideration of new taxes that may improve the supply of housing.

Tax simplification:
This is stated as an area of priority. Currently, feasibility expenditure on capital projects is typically non-deductible. This is to be reviewed and, ideally, this type of “innovative spending” may be deductible in the future. Tax losses are only able to be carried forward by a company if certain shareholder percentages are maintained. This is to be examined and perhaps we may see a ‘same business test’ similar to Australia. Further, the TWG’s recommendation regarding re-introducing depreciation on buildings or allowing costs on seismic strengthening to be depreciable will be considered.

Sustainability and tax:
Recognising that a sustainable economy and the tax system are intertwined, the TPWP will work with other agencies to consider reform of the Emissions Trading Scheme, the Waste Disposal Levy, congestion charging in Auckland and improvement of water quality and reducing nutrient run-off. The TPWP will consider the tax implications of new environmental policies on existing tax regimes, e.g. exempting employer provided public transport from FBT.

Charities and business:
Application of the current income tax exemption for charities will be reviewed due to continuing concerns regarding the accumulation of surpluses by charitable organisations. We would not be surprised if there is change in this area. For example, charities may be required to pay tax on business profits, but that tax is refunded by IRD when the profits are spent on charitable objectives. Conversely, entities owned by public authorities and local authorities are increasingly asking for access to income tax exemptions for activities that provide community-based outcomes, giving rise to the need to review the current income tax exemptions that are available. The above will be of interest to the private sector and ensuring the competitive landscape is neutral.

Miscellaneous:
– An 18 month timeframe for the implementation of Release 4 of the IRD’s Business Transformation (BT) programme focusing on student loans and KiwiSaver.
– Design work on Release 5, focused on Child Support.
– Work will continue on double tax agreement negotiations and free trade agreements to address issues around international tax and the low levels of tax paid by digital companies.
– The Government will continue to work with OECD working parties in reviewing the international income tax framework. A product of the work done with the OECD was the enactment of new Base Erosion and Profit Shifting (BEPS) measures to counter actions by multi-nationals to limit taxes paid in certain jurisdictions so as to achieve an equitable international tax system.

The TPWP set-outs a long ‘to-do’ list for the Government and IRD. However, given the TWG made a number of positive well researched recommendations, it would make sense for a number of them to be implemented without delay. Earthquake strengthening and allowing deductions for feasibility expenditure are two examples that pass the ‘common-sense’ and ‘benefit to the economy’ tests. We will have to wait and see.

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