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In late November 2024, the chief economic advisor at New Zealand Treasury, Dominick Stephens, addressed the CA ANZ Annual Tax Conference and laid out an alarming scenario.

“In the absence of policy change, the government’s books are on an unsustainable trajectory,” Stephens said.

“New Zealand’s population is growing older, with an increasing share of the population aged over 65. The government spends considerably more on over-65s than it gathers from them in tax revenue. Therefore, as the over-65s become a major share of the population, the public purse will be stretched further and further.”

Stephens made the point that New Zealand’s universal public pension is the highest basic pension paid out

of general taxation relative to gross earnings among Organisation for Economic Co-operation and Development (OECD) member countries.

Government finances were under pressure after a series of natural disasters and the COVID-19 pandemic, with the nation running a fiscal deficit of around 3.1% of GDP. Treasury projections have the national budget deficit widening to NZ$13.4 billion in 2025 and not returning to the black until 2028, a year later than previously forecast.

While it cut taxes in its first budget as part of a tax package worth NZ$14.7 billion over four years, the government’s response to its fiscal dilemma was to look for savings in expenditure.

No ‘burning platform’. Yet

This is in an environment where the economy is slowing, productivity is deteriorating, and taxation revenue is also coming in lower than expected.

“We definitely have a structural gap and it’s of the magnitude of around NZ$10 billion or so at the moment,” says John Cuthbertson FCA, New Zealand tax and financial services leader at CA ANZ.

“It is going to require some sort of fix. What that will be depends on the nature of the government and their willingness to deal with issues of equity.

“Taxes bring home the goods when the economy is going well, but when it isn’t, that’s when tax revenue drops off and highlights that our tax base could be broader, providing greater resilience.”

While Stephens concluded his speech on a positive note, outlining government policies to boost productivity and investment, he didn’t touch on perhaps the most controversial question in the taxation debate: the tax base itself.

While not a ‘burning platform’ as yet, the tax base faces significant challenges over the next decade if it is to get anywhere near funding the fiscal needs of the New Zealand Government, squeezed as it will be by changing demographics and a massive infrastructure deficit.

Peter Vial FCA, CA ANZ group executive New Zealand and the Pacific, points out that New Zealand relies heavily on personal income tax, which provides more than 50% of the total tax base. Another 25% comes from the GST – introduced in 1986 at a rate of 10%, increased in 1989 to 12.5% and lifted to 15% in 2010. Company tax comprises another 16%.

“So, 90% or so of our tax base comes from those three bases only and that is a narrower base than other OECD countries,” says Vial.

“Our GST is considered one of the most efficient in the developed world. It’s a solid base: hard to avoid and easy to comply with. Our issues of sustainability are really about personal income tax and company tax which is set at 28%.”

“Taxes bring home the goods when the economy is going well, but when it isn't, that's when tax revenue drops off and highlights that our tax base could be broader, providing greater resilience.”

Vial worries that a single focus on cutting expenditure, while a key lever, won’t be enough to get New Zealand back on a “sustainable fiscal course.”

One target to reduce the fiscal burden could be national superannuation, a universal system that kicks in at 65 with no means testing.

New Zealand has its KiwiSaver retirement savings framework and has not chosen to go down the Australian route of compulsory superannuation, which was conceived in the 1990s partly as a way of reducing dependence on the government pension.

Demographic changes will mean that a larger percentage of the population will be relying on the publicly funded superannuation, but they will be reliant on a smaller percentage of taxpayers to fund them.

“Back in the 1970s, I think we had seven income earners for one person receiving the national superannuation,” says Vial. “Currently the number is four taxpayers for every superannuant and in the late 2040s we’ll only have two.”

The unsustainability of the burden these demographic changes will bring raises significant questions, he says.

Should publicly funded superannuation be means-tested? Should the age of eligibility be increased from 65 currently to 67, as Australia is now doing in stages for its means-tested pension?

New Zealand did previously pay superannuation at the age of 60, but that was gradually increased to 65.

Political will

As with all tax issues, it comes down to politics and whether the party in power has sufficient capital to burn on what will always be controversial and potentially unpopular tax policies.

“The last time we had major tax reform was in the mid-1980s, with the introduction of the GST and the dropping of the marginal tax rate,” says Vial. “Since then, successive governments have tinkered around the edges with the marginal tax rates and thresholds, but there’s been no substantial or significant change to the tax base.”

Vial sees two major circuit-breaking opportunities: the four-year outlook statement from Treasury is to be released in May this year, in addition to a long-term insights briefing from IR, the government department charged with advising on tax matters.

More comprehensive than the regular statements on the national budget, Treasury could follow up Stephens’s comments on tax sustainability with a more detailed analysis of the dilemma New Zealand is facing. IR’s advice is independent of ministerial direction, and the department has already said that its focus will be on the tax base and taxation alternatives.

Debate stimulated from these two reports could create a more informed discussion on the options the country faces and foster a consensus view of the way forward.

“Having both of these in the same year is a good thing and having them happen a year out from the next election is also potentially positive,” says Vial. “This is real expert analysis based on evidence and data, and it should feed into the public discourse. Hopefully, politicians on both sides of the house won’t be able to run away from the discussion.”

Capital gains tax?

Vial expects one of the topics up for debate will be the introduction of a capital gains tax, a measure which successive New Zealand governments led by both major parties have ruled out. This is more likely to be considered than options such as payroll taxes or estate taxes, the latter of which was repealed in 1992 after being in effect for almost 130 years.

“The politicians haven’t been very bold about this issue of capital gains,” says Vial. “In the 1980s, we had a government that had to be bold because it was facing a crisis and even potentially bankruptcy. I’m not saying we are close to that now, but we do have a worsening economic outlook and, with these two reports, that creates an opportunity for real discussion and it would be wonderful if that could be bipartisan.”

New Zealand has had a de facto capital gains tax on property investment, the bright-line test, which imposes taxes on the sale of property, depending on the date you acquired it and when the property was sold. Instead of maintaining or extending the test, the current government is property investor-friendly and has reduced the period captured by the test to two years, down from 10 years for existing homes and five years for new builds.

Another concession to property investors, at the expense of the tax take, has been the reinstatement of interest deductibility on residential loans. Many observers welcomed this as putting property investors on the same footing as other businesses and investors.

“Almost every country in the OECD has a capital gains tax and most of them have had them for decades,” says Vial. “Some work better than others, so we have an opportunity to learn from their experiments and mistakes.

“And, just like we ended up with perhaps the best GST in the world, why can’t we create potentially the world’s best CGT?”

This will only be possible after a vigorous national debate and bold action by a government that realises how important the move is for New Zealand’s future, well beyond the electoral cycle.

There are restraints and challenges. The family home, as in Australia, is likely to be sacrosanct and remain untouched, and there would be issues in working out formulas for lands and assets that are held collectively, as many are through iwi or Māori organisations.

While it has issues, a CGT presents as the most likely way to widen the tax base, as most other avenues have been exhausted or reached a dead end.

For example, New Zealand has done what it can in terms of legislating to claw back revenue from multinational companies and has enacted the OECD’s Global Anti-Base Erosion Model Rules (Pillar Two). These rules, which will come into effect once the mechanism is taken up by a critical mass of other countries, will ensure that multinationals with global turnover of more than €750 million in two of the four preceding years pay at least 15% tax on their income in each country where their income is reported.

This will apply to approximately 25 multinationals that are active in New Zealand and also to subsidiaries of groups operating in New Zealand that meet the income threshold.

Vial points to opinion polls showing majority support for a CGT, in some form, as a sign that public opinion understands that something needs to be done. This is a necessary first step in convincing politicians that they won’t necessarily be losing votes if they implement tax reform.

Towards tax reform consensus

Cuthbertson believes that while the debate has been “incremental,” it is moving forward to a point where change will be possible.

“There needs to be a rebalancing and the tax base needs to be widened, but it can only be supported if it is equitable and is seen to be so,” he says. “If people who are struggling themselves are required to pay more income tax, then I think there will be a backlash.”

CA ANZ, he says, supports tax reform and sees the organisation’s role as fostering and contributing to the debate.

“We want to put the issues out there and socialise them in the public domain,” he says. “We can help articulate the issues and facilitate informed decisions which address the challenge, but which people can reach consensus on.”