- New Zealand’s coalition government has decided against implementing a capital gains tax regime.
- CA ANZ has identified three priority areas for reform: making life easier for SMEs, allocation of rights to NZ for an international digital tax, and cracking down on the hidden [black] economy to boost tax revenue.
- However, CAs in practice say they only expect modest changes to make tax simpler for SMEs.
By Helen Corrigan
“Yes, but. No, but,” was about as far as New Zealand tax reformers got for decades when kicking around the idea of a capital gains tax (CGT).
All that changed in February this year when a high-profile Tax Working Group report reiterated its supported for a CGT, only to have the recommendation swiftly kicked into touch by the Coalition government.
Revenue Minister Stuart Nash said at the time that other ideas in the report about improving tax “fairness, balance and structure” would be followed up instead.
Officials had been directed to prioritise encouraging investment in significant infrastructure projects and improving the tax system to crack down on tax dodgers, among other initiatives, he said. A refreshed tax policy work program would be released mid-year.
The decision not to proceed with introducing a CGT regime means the hoped-for boost to future projected revenue has gone missing. While not having an immediate effect, the base broadening and revenue stream of a CGT would mitigate the government’s reliance on income tax revenue in the future. Bringing in a CGT now would provide more security and certainty for the overall tax base in a decade to come.
Where next for New Zealand tax reform?
A CA ANZ position paper, released after the government’s response to the Tax Working Group’s report became clear, suggested there should be three priorities for tax reform: making life easier for SMEs; shaping taxation of the digital economy (the so-called Google tax) in line with the Organisation for Economic Cooperation and Development (OECD), rather than imposing a unilateral NZ digital tax; and dealing with the hidden economy. But what do CAs in the field think?
For Michael Turner CA, a Dunedin-based partner at Polson Higgs, the government’s decision not to pursue any of the report’s CGT recommendations, plus the Labour Party’s pre-election promise of no new taxes, means only relatively small changes in the tax space are likely in the foreseeable future.
“But the government continuing to talk up combatting tax dodgers, land speculation and land banking, while promoting ‘fairness’ in the tax system – a term used when telling us we needed a capital gains tax – suggests we’re likely to see changes that further erode the capital revenue boundary, and increase the tax burden on others, for example, multinationals,” he says.
Turner also suggests that there are likely to be modest concessions to try to simplify the tax system for SMEs and to further government policy in areas such as research and development.
“The ideology from the government has not changed, it’s just the tools they now have in the tax space to achieve their objectives have been significantly reduced,” he says.
Are SME tax burdens on the increase?
While Mark Scott FCA, of Mark Scott Tax Services in Napier, agrees with CA ANZ’s priorities, he notes that successive governments have talked about simpler taxes for SMEs for years.
“The reality is SME tax compliance burdens only ever seem to get worse,” says Scott.
“The reality is SME tax compliance burdens only ever seem to get worse.”
Recent government and Inland Revenue efforts to use new technology to make completing returns easier have been a learning curve for both sides.
“For example, the new payday filing requirements since 1 April 2019 can potentially see a company paying mum and dad a weekly salary having to electronically lodge payroll information with Inland Revenue up to four or five times a month, compared with monthly previously.”
Of course, the Tax Working Group is not the only body looking into the small business sector. A Ministry of Business, Innovation and Employment (MBIE) Small Business Council initiative for a small business strategy, currently underway, could pave the way for pruning red tape and streamlining processes. That would allow small business owners to get on with what they do best – running their businesses.
“It’ll be interesting to hear what initiatives and recommendations the council comes up with when they report to the Minister for Small Business later this year,” says Scott.
Recovering lost tax revenue
Scott says while some form of digital tax on advertising revenue earned by non-resident social media platforms is warranted, it’s not a New Zealand-only issue and the government should ensure any moves keep in with directives from the OECD.
“If we move too quickly, we could end up with a digital taxes model at odds with the international community, and some messy implications under trade agreements and double tax treaties.”
He also believes every New Zealander has a stake in initiatives to ensure tax collection from the hidden economy, estimated to cost over a billion dollars annually.
CA ANZ’s position is that the hidden economy should be a particular area of focus, and that the government should put greater effort into detection and enforcement. As well as impacting on the provision of key government services, losing that amount of tax revenue means an unfair burden is placed on law-abiding taxpayers.
Still other issues to resolve
An elephant still in the room is the ‘transfer system’, as the Working for Families payments are often called, says Scott.
“The availability of Working for Families tax credits creates material distortions in the labour market, and is a barrier to both wage growth and productivity.
“While analysis of the system is needed to find better models that allow average New Zealanders to make ends meet, it’s not easy when Working for Families is so prevalent among our households.”