By John Cuthbertson CA
New Zealand Tax Leader

Based on Australia’s experience, some Kiwi tax accountants and valuers could be in line for a 25% increase in business if the New Zealand government proceeds with a broad capital gains tax (CGT), expected as one of the recommendations in the Tax Working Group’s final report, due for release on 21 February 2019.

But to take on this opportunity, CA tax practitioners will be on a steep learning curve to master the likely complexities of any new CGT. Some may choose not to personally upskill or hire experts.

On a personal level, accountants with investments may be ambivalent about any extension of taxes on capital income.

However, a new capital gains tax has a number of steps to go through before these opportunities, or concerns, become reality.

The first, and most likely to happen, is the Tax Working Group will recommend a broad-based CGT in its final report. The second step is the government has to commit to a CGT when it fully responds to the group report in April.

Complicating matters is the position of coalition partner New Zealand First which in the past has opposed a CGT. Labour will require NZ First’s support.
Finally, if all this comes to pass, Labour has to take a new CGT to the 2020 election, with the tax a possible centrepiece of its campaign, and then be re-elected to form the next government.

“There is not enough time for the government to fully consult and then legislate to meet their own deadline.”

Are there better alternatives to a broad-based CGT?

The 11-strong Tax Working Group was established to look at the structure, fairness and balance of the New Zealand tax system. It gathered for the first time in January 2018.

In CA ANZ’s submission to the Group, we said there was no need to introduce a comprehensive CGT, or “taxation of income from capital” as government ministers phrase it. Given all the associated complexity and costs of compliance, we asked “are there better alternatives to address any deficiency?”

We recommended that the status quo be retained – New Zealand already has a number of taxes on capital gains – and any taxation of speculative investments be included in the Income Tax Act framework.

It was heartening to see the Tax Working Group pick up on our recommendation when it released its interim report in September 2018. The group took a sensible and pragmatic approach.

Taxation of Income on Capital - interim conclusions (Click image to enlarge)

Tight timeframe could squeeze consultation on the CGT

But we fear that sensible, pragmatic approach could be undone by the tight legislative timeframe the government has set itself.

In a pre-Christmas letter to the finance and revenue ministers, CA ANZ urged the government to consider deferring the introduction date of a CGT and to stage its application, starting with income-producing land.

Good tax legislation takes time. From what we can see at the moment, there is not enough time for the government to fully consult and then legislate to meet their own deadline.

The early consultation and design stages, where stakeholders and the public have the opportunity to share their views on a capital gains tax, are at risk of being dangerously shortened to squeeze in this process before the election.

Has the tax burden on small businesses been overlooked?

Since the interim report, media attention and public debate has almost entirely focused on a new CGT. But as CA ANZ indicated in our original submission, there are a number of other important issues on the Tax Working Group’s plate.

Of particular concern is the tax compliance burden faced by New Zealand’s small businesses.

The Working Group has identified several areas for immediate action, including increasing the NZ$2500 threshold for paying provisional tax to $5000-$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.

We hope the government will pick these up, but they do not go far enough to redress the imbalance of the tax compliance burden between small and large businesses, and the inadvertent and deliberate non-compliance that results from this.

“CA ANZ urged the government to consider deferring the introduction date of a CGT and to stage its application.”

As well as calling for a presumptive tax for very small businesses, which would remove all complexity around deductions and the amounts returned would be “close enough”, CA ANZ also asked the Tax Working Group to consider:

• de minimis thresholds for complex tax regimens, particularly the ones that bring in little revenue
• a standard fixed deduction or fixed adjustment rate for compliance-cost-intensive activities such as maintaining Fringe Benefit Tax logbooks on motor vehicles and the threshold rules around the entertainment regimen
• a Taxpayer Advocate Service as an independent “voice for the taxpayer” within the tax system which will go a long way to address taxpayer burn-off.

Focusing on compliance cost reduction for small business will create growth across the small business sector. Our fear is that the Tax Working Group’s final report, and the government’s reaction to it, will be an opportunity lost for meaningful small business reform.