Date posted: 07/12/2017 7 min read

Inequality sets agenda for wide-ranging NZ tax review

A new tax working group has been set up to fully review the New Zealand tax system with a focus on fairness.

In Brief

  • Capital gains tax recommendation “inevitable”
  • Differing corporate tax rates for small and big business are on the table.
  • New tax group to report by February 2019.

By Pattrick Smellie.

Eight years after the last comprehensive review of the New Zealand tax system by an independent working group, the newly-elected Labour Party-led government has set out terms of reference for a fresh look.

Between 2008 and now, perhaps the two biggest changes to the tax environment have been accelerating global digital commerce and in the developed world, the growing politics of inequality as exemplified by Thomas Piketty’s 2013 blockbuster on wealth versus income accumulation, Capital.

The inequality dynamic drives the review’s terms of reference, which were released by Finance Minister Grant Robertson on November 23. “Fairness” is a key objective for the tax group.

To be chaired by Sir Michael Cullen, who was Robertson’s predecessor in the 1999-2008 Labour-led government, seven other members of the group will be appointed before Christmas, with a relatively tight final reporting date of February 2019.

Their task is to report on “whether the tax system operates fairly in relation to taxpayers, income, assets and wealth” and how well it balances between “supporting the productive economy and the speculative economy”.

Much of this concern is rooted in Labour’s political need to move beyond the vote-killing issue of whether or not to apply a capital gains tax (CGT). It campaigned on the issue in 2011 and 2014 and this was blamed for the 2014 defeat. 

Capital Gains Tax

Promising a working group was intended to sideline the capital gains issue in the 2017 election, but even so, it nearly tripped up the party’s newly-installed leader Jacinda Ardern. To shut the capital gains tax issue down, she was forced to promise not to implement anything flowing from the working group’s recommendations until after the 2020 election.

Not everyone is convinced that a capital gains tax is off the agenda forever, as long as the family home can be successfully carved out.

(Pictured: Jacinda Ardern. Hagen Hopkins/Getty Images)

“We are inevitably going to have a capital gains tax recommended and enacted with an effective date post the next election,” says Bevan Miles, a tax partner at law firm Chapman Tripp. 

But two members of the last 2009 working group, PwC’s managing partner in New Zealand, Geof Nightingale FCA, and EY tax partner, and Chair of CA ANZ’s Tax Advisory Group, Paul Dunne FCA are more doubtful. The existing deemed dividend regime that already applies to international equities could potentially be applied to New Zealand and Australian investments.

Miles anticipates the working group will look to Australia and further afield for answers on tax design questions such as how to grandparent existing arrangements and how to treat investment vehicles such as PIEs. Portfolio Investment Entities (PIEs) don’t apply a CGT to New Zealand and Australian earnings but do use a deemed dividend approach for international income. 

Cullen told the Investment News service he sees “no reason” why the group wouldn’t examine both the PIE and Fair Dividend Rate regimes, although he stresses he comes to the issue “with no pre-judgement”. 

Dunne suggests Australia’s “event-based” approach to determining when to levy a capital gains tax may be an option.

Related: Focus on fair and efficient tax policy

Ad hoc changes to the tax system are likely to lead to a less effective tax system and “cause for regret,” says New Zealand Tax Lead.

Where all three are heartened is in Robertson’s upfront commitment to a “simple and efficient tax system” – code for a broad-based, low-rate approach that has characterised New Zealand tax policy since major economic reforms in the mid-1980s.

“There’s a clear acknowledgement of the current tax framework: neutrality and as much in the background as possible,” says Nightingale. 

He also welcomes an instruction not to seek a larger tax base, with Robertson targeting “a sustainable revenue base to fund government operating expenditure around its historical level of 30 per cent of GDP”. 

“That’s a positive signal,” says Nightingale, as is an instruction not to make recommendations about the rate at which taxes, new or existing, should be applied.

However, CA ANZ tax lead John Cuthbertson CA has concerns about the timeframe. Where Nightingale sees a five to 10-year horizon as appropriate to a fast-changing global economy, Cuthbertson says that timeframe is “too short to be truly transformational if we are serious about achieving the stated desire of a tax system fit for purpose for the 21st century”.

That’s partly because so much structural change is occurring, but also because the tax system will soon need to help meet the challenges of an ageing population and the burden that will place on younger taxpayers.

“The younger generation did not appear to be explicitly covered in TWG (Tax Working Group) membership”, yet intergenerational equity will be a key issue for the tax system in the future. “Given current demographics, I would have thought it key that this group were directly represented on the working group,” says Cuthbertson.

While acknowledging big changes in the global economy since 2009, Nightingale suspects the working group will find little new ground to tread when assessing how to tax wealth more and income less.

Small businesses are currently faced with a disproportionate compliance burden - one size does not fit all
John Cuthbertson CA CA ANZ tax lead

However, one area of potential is in creating a differential corporate tax rate that will tax New Zealand’s backbone small and medium-sized enterprises at a lower rate than large and trans-national businesses.

“I think that’s a serious proposition because of the suspicions that Inland Revenue has, that multinationals make economic rents out of New Zealand and that they aren’t sensitive to tax rates as a result,” says Nightingale.

Such a move can “bridge the gap between creating a good tax environment for local businesses without losing the economic rents”, he says, although Miles notes that will complicate the imputation/franking credit regime.

Simpler tax

Cuthbertson says the working group should focus on tax simplification for small businesses over tax cuts.

“Small businesses are currently faced with a disproportionate compliance burden - one size does not fit all. Current tax legislation is more complex than required for small business. Close enough is good enough is being lost in legislation – real tax simplification is required.

“A differential corporate tax rate would introduce threshold application issues and potentially discourage business growth at the margin. The Australian experience is not a happy one.”

Related: Preparing for a new world of whistle-blowing

As New Zealand’s new money laundering and terrorism financing laws extend to accountants, the Department of Internal Affairs says help will be available.

Pattrick Smellie is an owner of BusinessDesk, a New Zealand economic and business news service and former NZ correspondent for The Australian.

Search related topics