New Zealand: The future of tax – what can we look forward to?

Brief Counsel

The Tax Working Group's (TWG) recently released interim report discusses progress on its review of the structure, fairness and balance of New Zealand's tax system. A snapshot of the report highlights, plus more detailed analysis on the findings and interim conclusions are below.

AT A GLANCE: TAX WORKING GROUP (TWG) INTERIM REPORT HIGHLIGHTS

Capital gains tax (CGT)

  • Likely to be recommended
  • Exact form of CGT is yet to be determined
  • TWG sees CGT as unlikely to have a large impact on the housing market
  • General wealth and land tax off the table

Retirement savings

  • Recommends removing the Employer Superannuation Contribution Tax on the employer's 3% Kiwisaver contribution for members earning up to $48,000 per year, and reducing the lower PIE rates for KiwiSaver funds by five percentage points each

Environmental and ecological outcomes

  • TWG sees scope for a greater role for taxes in improving the environment

Corrective taxes

  • TWG recommends the Government simplifies the rate structure of alcohol excise, prioritises other measures to help people stop smoking and develops clearer goals regarding sugar consumption and gambling

GST

  • No material change recommended

Personal income and the future of work

Recommends expanding the use of withholding taxes on payments to contractors and reviewing the existing GST treatment of contractors who are akin to employees

Business tax

  • No substantial changes to business tax but includes recommendations to reduce compliance costs

Charities

  • TWG supports including the tax treatment of charities in the review and notes growing concern that charities are accumulating surpluses rather than applying these for the benefit of their charitable activities

Tax system administration

  • Recommends establishing a taxpayer advocate service to assist with resolving tax disputes

Capital and wealth

For many, the main item on the TWG's agenda is the question of whether New Zealand should introduce a capital gains tax (CGT) and, if so, what it should look like. While we expect the TWG will recommend a CGT in its final report, it is still working towards designing the most optimum CGT in order to compare a potential CGT with the status quo. That comparison should lead to a recommendation in the TWG's final report expected in February.

The two options being considered are:

  1. Extension of existing rules to tax gains on assets not currently taxed:
    • assets to be taxed would include land (but not the family home), intangible property (including goodwill), shares and all other assets held by a business
    • non-residents would only be taxed on New Zealand land held (including shares in a land-rich company) or on assets held through a New Zealand branch, and
    • tax would apply to assets realised after a specified effective date, with gains from that date taxed. This would necessitate valuation of assets held on the effective date.
  1. Taxing certain assets at a deemed risk-free rate of return:
    • risk-free return method (similar to existing FDR regime on foreign equities) would replace existing taxation of income for relevant assets (both existing income and deductions), and
    • there would be a requirement to determine net equity in the relevant asset.

A general wealth tax and a land tax are both off the table.

A key design challenge will be how to integrate a new CGT into the existing tax rules without defeating the underlying policy rationale or creating unintended outcomes. For example, double taxation may arise as a result of taxing share gains at the shareholder level (where some of the gain on the sale of the shares reflects an appreciation in the value of capital assets held by the company) as well as taxing the company at a later time when it realises a gain on sale of the same capital assets. The TWG is still considering potential solutions to these types of issues.

Chapman Tripp comment

It is encouraging to see the TWG recognise that different choices about how we tax capital income have the potential to distort capital markets. Clearly we do not want the New Zealand equity markets undermined and we hope that the TWG carefully considers these issues before making its final recommendations.

Interestingly, the TWG's view is that a CGT would be unlikely to have a large impact on the housing market. Its view is that "tax has not played a large role in the current state of New Zealand's housing market, and will be unlikely to play a large role in fixing it". We expect that is a view that won't resonate with all; many have a perception that a long-standing tax preference for investing in real property has been a significant factor.

The TWG accepts that a CGT would significantly increase compliance and administration costs, both for taxpayers and Inland Revenue. In our view, it is important that this is not downplayed. It only takes a look across the Tasman to appreciate the complexity required of a CGT, with the Australian regime containing numerous provisions dealing with base maintenance/integrity, rollover relief, limitations and exceptions. We believe a critical part of considering both whether New Zealand should introduce a CGT and, if so, its design is understanding the compliance costs involved and minimising (or eliminating) these as much as possible.

Ultimately, it is almost certainly politics that will determine what, if any, CGT we end up with.

Retirement savings

The TWG recognises that there is a case to introduce additional tax concessions for retirement savings targeted towards low and middle income earners. It recommends:

  • removing Employer Superannuation Contribution Tax on the employer's matching contribution of 3% of salary to KiwiSaver for members earning up to $48,000 per year, and
  • reducing the lower PIE rates for KiwiSaver funds by five percentage points each.

Chapman Tripp comment

We would like to see more done in this space to encourage saving more generally, given that the median percent of savings for households (with the highest income earner aged between 30 and 60 years old) is 0% for seven of the ten income brackets.

Relevant to both retirement savings and to a CGT is the difficult question of how gains made by KiwiSaver funds and PIEs on New Zealand and Australian shares might be taxed if a CGT is introduced. This will be an important issue for fund managers, with different policy options presenting very different levels of administrative and practical challenges.

Housing affordability

The TWG was specifically directed by the Government to consider housing affordability, including whether housing tax measures would improve the tax system. As noted above, the TWG does not see tax as the answer. Broadly, the TWG views supply constraints, not tax, as the cause of unaffordable housing. That said, the TWG has identified some areas where tax reform could encourage additional housing supply, such as re-introducing depreciation deductions on buildings and imposing a vacant land tax.

Environmental and ecological outcomes

The TWG sees "significant scope" for taxes playing a greater role in delivering positive environmental and ecological outcomes. Some of these may include:

  • expanding the coverage of the Waste Disposal Levy, and reassessing waste and landfill disposal externalities to see if higher rates are warranted
  • strengthening the ETS
  • advancing congestion charging
  • greater use of tax instruments to address challenges in both water pollution and water abstraction, and
  • expanding the role for environmental taxes to address other challenges such as biodiversity loss and impacts on ecosystem services.

Chapman Tripp comment

In our view care needs to be taken before introducing new taxes in this space. As the TWG acknowledges, taxation is not necessarily the best tool to change behaviour. We would like to see more thought go into other options such as regulation.

Corrective taxes

Corrective taxes are those primarily intended to change behaviour that is judged to be undesirable. The TWG recommends the Government:

  • simplify the rate structure of alcohol excise
  • prioritise other non-tax measures to help people stop smoking, and
  • develop a clearer articulation of its goals with regard to sugar consumption and gambling activity.

Chapman Tripp comment

We agree with the TWG that further corrective taxes are not desirable.

GST and financial transaction taxes

The TWG rules out all of the following: a reduction in the GST rate, introduction of new GST exceptions, changing the GST treatment of financial services and introduction of a financial services tax.

Chapman Tripp comment

We agree that New Zealand's GST rules are better left without material modification. Introducing changes based on social policy objectives creates further complexities and in some cases could distort economic behaviour. Redistribution of income can be done more efficiently through other mechanisms.

Personal income and the future of work

The TWG's interim report also looks at how individuals (employees and contractors) are taxed. The TWG recommends:

  • expanding the use of withholding taxes on payments to contractors, and
  • reviewing the existing GST treatment of contractors who are akin to employees (with a view to creating a similar outcome – i.e. no GST).

Chapman Tripp comment

We can understand the benefit in a broader withholding tax regime applying to contractors. However, for some contractors this may be unfairly strict. In the case of a broader withholding regime, there may be scope for a broader exemption regime where, for example, contractors with a proven tax compliance record can apply to be exempt from withholding on payments made to them. The potential impact (from a compliance cost perspective) on payers of withholding payments also needs to be carefully considered.

The taxation of business

At this stage the TWG has not recommended any significant or substantial changes to the taxation of businesses. However, recommendations have been made to reduce compliance costs, such as:

  • increasing the $2,500 threshold for paying provisional tax to $5,000-$10,000
  • increasing the $10,000 year-end closing stock adjustment to $20,000-$30,000, and
  • increasing the $10,000 limit for the automatic deduction for legal fees (and potentially expanding the automatic deduction to other types of expenditure).

Chapman Tripp comment

We would like to see the loss continuity rules relaxed in certain cases, for example a "same or substantially the same business" test could be applied to allow companies to carry forward losses where they would otherwise not be able to due to a loss of shareholder continuity.

Charities

The TWG supports the Government's inclusion of a review of the tax treatment of the charitable sector and notes that there is a growing concern that charitable entities are accumulating surpluses rather than distributing or applying those surpluses for the benefit of their charitable activities.

These tensions also need to be balanced against the fact that charities may have good reasons to accumulate funds (for example, to take an intergenerational view towards the management of assets).

Chapman Tripp comment

We think that the TWG has rightly acknowledged the differing views on this matter and would like to see the right balance struck if any changes were to be introduced.

The administration of the tax system

The TWG's recommendation of most interest to us in this area is the establishment of a taxpayer advocate service (for certain taxpayers – such as low income earners, small businesses, and individuals with English as a second language) to assist with resolving tax disputes.

Chapman Tripp comment

We strongly encourage this recommendation and support any such service to be run independently from Inland Revenue.

Where to from here?

The TWG notes it has much to do before presentation of its final report in February 2019. It will continue to consider the issues in front of it, and is welcoming further feedback. Please contact us if you would like to provide feedback to the TWG and we can assist with submissions.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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