20 September 2017

What is at stake on 23 September [NZ elections] for tax policy?

Tax is a top issue this campaign, featuring strongly in the leadership debates, and is a major point of difference.
New Zealand Tax
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Tax has been a top issue this campaign, featuring strongly in the leadership debates, and is a major point of difference among the parties.

We take a look at some of the more contentious and interesting tax policies, starting with the old chestnut of capital gains tax (CGT) – any changes to which Labour has now ruled out until after the next election.

We have prepared a table to allow easy comparison of each party's proposals.

CGT (or is it really about taxing residential housing investment?)

The Greens are proposing a CGT on all but the family home. Labour has not ruled out doing this, but would first establish a tax working group to consider the merits of the tax (and other taxes).

After taking over the Labour leadership, Jacinda Ardern sought a mandate to implement any recommendations arising from the working group's report within the first term but Labour has now returned to the position under Andrew Little and will take any changes back to the electorate before implementation.

National would not introduce a CGT.

At a theoretical level, a CGT makes some sense. New Zealand's tax system can be described as "broad-base, low rate" (or BBLR for those fond of tax acronyms). A clear gap is the non-taxation of capital gains (although we do tax some – see more on that below). In Labour's view this creates an unfairness between the tax contributions expected from those who generate their wealth through income and those who generate wealth through capital appreciation.

At a political and practical level, CGT is not straight forward.

  • Excluding the family home may make political sense but would take a significant proportion of the potential tax base off the table.
  • Taxing farms may also prove to be politically difficult.
  • At the practical level, issues such as whether you tax on an accrual or realisation basis need to be grappled with. Imposing tax on gains not yet realised might be perceived by some to be unfair (for example if it required assets to be sold to fund the tax).
  • But tax on realisation also brings challenges including the potential for lock-in effects (holding assets longer than would otherwise be desirable to avoid/defer the tax) and the counter-cyclical nature of the tax (capital losses, rather than gains, would be more likely in times of economic stress, which is generally when tax revenue is required the most).

When considering whether a CGT is right for New Zealand, we should keep in mind that New Zealand already taxes some forms of capital gains – for example, from financial instruments and some land sales.

To establish whether we need a broader based CGT, we should be asking what problems this might address and how well it would address them. The tax preference given to investing in residential rental properties, for instance, could be addressed by a more targeted solution that levels the tax playing field between different forms of investment.

Labour is proposing changes that go some way in doing that, namely:

  • extending the bright-line test on property investments from two to five years, and
  • abolishing negative gearing so that property speculators will no longer be able to use tax losses on their rental properties to offset their tax on other income.

An alternative approach is to reduce the rate of tax on other forms of investment. For example, New Zealand First proposes providing a tax advantage for approved savings schemes.

Food for thought for Labour's tax working group?

Individual tax rates and income transfers

The Greens are alone in proposing an increase in the top tax rate. Labour and National would leave it at 33%. ACT and The Opportunities Party would decrease it.

National increased benefits in last year's budget. The jewel in this year's budget was the Family Income Package, to take effect from 1 April next year (assuming National is returned for a fourth term). Key elements are:

  • a tax cut on incomes up to $52,000 a year (created by raising the bottom two tax thresholds)
  • increases to the Family Tax Credit of $9 a week for the first child under 16 and between $18 and $27 a week for subsequent children, depending on age
  • increases to the Accommodation Supplement to reflect 2016 rentals, and
  • raising the maximum Student Accommodation Benefit by $20 a week.

Labour would scrap the tax cuts; raise Working for Families payments beyond National's proposed changes, introduce a universal Best Start payment of $60 a week in the first year of a child's life and to age three for low and middle income earners and provide a Winter Energy Payment for superannuitants and beneficiaries.

The Greens would increase all core benefits by 20%, increase Working for Families payments, create a Children's Credit of $72 a week and reduce the bottom tax rate to 9% from 10.5%.

The Opportunities Party would begin the roll out of its Unconditional Basic Income (UBI) policy, paying a flat $200 a week to everyone over 65 and to all families with children under three. The UBI is designed to recognise the fact that the economy of the future will not be able to employ everyone, the contribution of volunteer labour and the casualisation of work. It would eventually replace the welfare system.

No let-up for multinational businesses

All parties appear to be aligned in following through on the OECD's recommendations to counter "Base Erosion and Profit Shifting" (BEPS). Work is underway on draft legislation after the release of a series of consultation documents by Inland Revenue.

Moving away from BBLR?

As noted above, New Zealand has a broad base, low rate tax system and this is generally regarded as a good thing.

We believe care needs to be taken when proposing new taxes that target specific assets or activity (for example environmental taxes proposed by the Greens) or introducing new exemptions from our broad based taxes (for example NZ First's proposal to exempt food from GST) that we do not impair the integrity of our BBLR framework or introduce significant complexity.

PARTY Individual tax rates Business tax Capital Gains Tax / taxing land Cross-border taxation Other notable policies
National Family income package (summarised above) No further changes following those announced as part of Budget 2016 and enacted earlier this year Not supported Legislation implementing the OECD's BEPS proposals is currently being drafted None found
Labour Increase Working for Families payments, introduce a "best start" scheme to help families with costs in a child's early years, reinstate the Independent Earners' Tax Credit

Removing secondary tax
Raising the threshold for businesses to pay

Allowing businesses to meet tax obligations on their own timetable rather than the current system of provisional tax
Tax working group to consider implementation of a CGT

Extend bright-line test on property investors from 2 to 5 years

Abolish negative gearing (no longer able to use tax losses on rental properties to offset tax on other income)

Support BEPS proposals but would also introduce a diverted profits tax Labour has raised the prospect of introducing a new water tax on commercial users of water
NZ First Review Working for Families initiative with a view to abolishing it

Removing secondary tax
Reduce company tax rate to 25%

Tax incentives for R&D
None found Support BEPS proposals Exempt food from GST (other than food sold as part of a service in restaurants and takeaways)

Exempt residential rates from GST

Providing a tax advantage for approved savings schemes
Green Increase tax to 40 per cent for income over $150,000

Reduce tax to 9 per cent for income under $14,000

Introduce a tax-free income band

Increase Working For Families payments
Potential decrease for small businesses following introduction of carbon tax

Exempting electronic vehicles provided by an employer from FBT

Exempting public transport passes provided by an employer from FBT

Tax credits for R&D
Introduce a comprehensive capital gains tax on all but the family home Support BEPS proposals Replace the Emissions Trading Scheme with a carbon tax
TOP Reduce top marginal income tax rate to 30% None found None found Support BEPS proposals Tax income from all productive assets (including the family home)
ACT Reduce personal income tax rates across the board with the highest rate at 25% Reduce company tax to 25% None found Support BEPS proposals Reduce tax on tobacco

Share a portion of GST revenue collected from construction of new housing with local councils
Maori Party None found None found None found Support BEPS proposals Remove GST from milk and fresh fruit & vegetables

Share a portion of GST revenue collected from construction of new housing with local councils

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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