By Helen Ozolins

A tight timeframe is looming for New Zealand’s Tax Working Group (TWG). As its chair, Sir Michael Cullen, said in an interim report released late last week: “We have made some good progress in setting out the main choices and options – but there is still a great deal of work to do.” 

What then are the three main issues the working group needs to focus on ahead of the February deadline for its final report?

The most pressing topics are:

* Taxation of capital income (and the related issue of retirement savings)

* Small business

* Environmental and corrective taxes

Capital income and retirement savings

“The major work on for the TWG between now and Christmas is the design of taxation of capital income,” said John Cuthbertson, New Zealand Tax and Financial Services Leader for Chartered Accountants Australia and New Zealand (CA ANZ).

The interim report says much work is still needed in this area. It is currently considering two main options: an extension of the existing tax net by taxing gains on assets that are not already taxed; and the taxation of certain assets on a deemed rather than actual basis. It is not recommending a wealth tax or a land tax.

“The status quo is a perfectly fine launch pad for what the Government wants to achieve,” Cuthbertson said. “The capital gains the Government is seeking to tax could be targeted by expanding the existing income tax regime.”

If they look to make a design concession and, for example, exempt KiwiSaver, that does pick winners and losers because other people have different ways of saving for their retirement.

Cullen warns that while extending the taxation of capital income will have many benefits, including improving the fairness and integrity of the tax system, it will increase administration and compliance costs and may lead to a reduction in the overall level of saving and investment.

“The technical difficulty of designing and implementing a system of taxing capital income which treats investments as equitably as possible will be a key item of discussion and thought,” KPMG told clients in a tax commentary article authored by partners John Cantin and Darshana Elwela.

The TWG says it will need to consider the options and trade-offs around retirement savings, but the potential for picking winners and losers is there. “If they look to make a design concession and, for example, exempt KiwiSaver, that does pick winners and losers because other people have different ways of saving for their retirement,” Cuthbertson said.

Small business

The TWG recommended against introducing a progressive company tax, noting that reductions in compliance costs were likely to be a more effective means of supporting small businesses. It is still forming its views on the best ways to reduce such costs and improve business productivity.

“We are happy with the direction of travel the working group’s taken there,” said Cuthbertson. “Reducing the burden that tax compliance costs bring will be more meaningful for small business than a progressive or reduced company tax rate.”

Greg Haddon, senior tax partner at Deloitte and deputy chair of CA ANZ’s Tax Advisory Group, notes this still needs considerable work. The TWG’s examples in the report around reducing compliance costs for SME taxpayers “are minor tweaks and are unlikely to have any real impact. Greater work needs to be done in this area,” he says. 

The recommendation to establish a taxpayer advocate service to assist taxpayers in disputes with Inland Revenue is in line with CA ANZ’s earlier consultation with the group. “We’d want to make sure the design was right but it’s a positive step to cut through the bureaucracy and taxpayer burn-off,” Cuthbertson says.

Environmental and corrective taxes

More work was likely on the environmental and corrective tax recommendations, but the report noted that weaknesses in the emissions trading scheme could be addressed without a carbon tax, Cuthbertson said. 

As an initial step, it has developed a framework for deciding when to apply taxes to address environmental issues. On the issue of water, ensuring the quality and supply are concerns, however tax instruments are identified as ill-equipped solutions.  

On corrective taxes outside the environmental area, it recommends simplifying alcohol excise rates and expresses concern about the distributional impact of further increases in tobacco excise. On sugar, the case for the introduction of a tax must rest on a clear view of the government’s objectives, the report says.

Government response

An indicator of the TWG’s future workload came in the government’s response to its report, in which it called on the TWG to consider measures to reduce inequality and increase fairness across the tax system and housing affordability. It also asked the working group to consider whether a tax on realised gains or a risk-free rate of return method is best for extending a potential capital income tax on specific assets with to ensure a fair and balanced system.

The government also requested further work in areas including:

- whether there are better approaches to understanding the wealth, capital income and effective tax rates of individuals.

- whether a tax-free threshold for the sale of businesses would l be appropriate.

- what compliance reduction options would be beneficial for small businesses. 

Feedback on the findings and recommendations in the interim report are required by 1 November and the group’s final report will be published in February 2019.

Helen Ozolins is deputy editor of Acuity.