- The New Zealand government has acknowledged that it has some fiscal headroom for tax cuts
- Inland Revenue’s massive Business Transformation programme is now real
- 2017 should be a “steady as she goes” tax year for New Zealand
For several decades, successive New Zealand governments, both National and Labour, have stuck to a broad base low rate (BBLR) approach to tax. With two notable exceptions – the absence of a comprehensive capital gains tax and a company tax rate of 28% – New Zealand’s tax base is broad and the tax rates are relatively low by international standards.
With new hands on the tax policy tiller since late last year, is this approach likely to change? No.The new Minister of Revenue, Judith Collins (pictured below), and the new Minister of Finance, Steven Joyce (pictured further below), will bring fresh perspectives. But both are unlikely to seek to change the fundamentals, or indeed see any need to do so.
Minister Joyce has a passion for the government’s Business Growth Agenda, while Minister Collins is the first lawyer in the role in a long time and has a master’s degree in taxation. Both will be focussed on maintaining fiscal stability and principled tax policy settings.
The passion of new Prime Minister Bill English for a social investment approach has not diminished. Significantly, he exhibited little appetite for reform of the fundamental tax settings in his eight years in the Finance portfolio. It is hard to see tax policy lurching in any radical new direction under their collective watch.
That said, 2017 is an election year and New Zealanders will go to the polls on 23 September. The government has acknowledged that it has some fiscal headroom for tax cuts, so we could see some adjustment to rates or thresholds announced either in the May Budget or between the Budget and the election in September.
There are, of course, competing priorities – sustaining the surplus, paying down debt, rainy day planning to future proof the economy against further shocks natural or man-made, and social investment. Rightly or wrongly, the mood of the electorate as reflected in the polls may dictate the extent to which tax cuts win out against those other priorities.
If there are tax cuts, they seem likely to be small and targeted at low and middle income earners. Tax cuts could involve changes to the personal marginal tax rate thresholds to mitigate the effects of fiscal drag. The last significant changes to rates and thresholds occurred near the beginning of the National’s time in power.
If there are tax cuts, they seem likely to be small and targeted at low and middle income earners.
As far as the election is concerned, the main opposition parties have yet to release any tax policies that would scare the horses. Labour also supports a BBLR approach and has backed away from the idea of introducing a comprehensive capital gains tax, which it floated in the lead up to the elections in 2011 and 2014.
The Green Party seems likely to stick with its capital gains tax proposal. The new Opportunities Party, led by economist Gareth Morgan, is proposing a radical new approach – taxing a deemed minimum rate of return on all productive assets, including housing and land. In an MMP environment, Morgan’s party will need to win 5% of the vote, or an electorate seat, before that policy has any chance of becoming more than a radical idea.
Changes at the margins
Although the tax fundamentals don’t look like they will change either before or after the election, we are likely to see some significant changes at the margins. The government is committed to addressing base erosion and profit shifting (BEPS), meaning we are likely to see some focus on interest limitation, hybrid instruments and entities, and transfer pricing.
Any reforms in these areas will affect larger enterprises operating crossborder. The trend to more information disclosure and more exchanges of information with overseas Revenue Authorities will continue apace. Information is becoming cheaper to gather and easier to share and new international agreements are driving the impetus.
Inland Revenue’s massive Business Transformation programme is now real.
Globally there is the prospect that President Trump’s desire to encourage US corporates to bring their profits home and to protect US businesses will have flow-on effects for the way taxes are imposed internationally. Real change though would seem unlikely in 2017. Turning the global tax settings ship around will take time.
As far as tax administration goes, Inland Revenue’s massive Business Transformation programme is now real. The first major plank of the programme, moving GST into myIR, was recently launched. PAYE is the next cab off the rank. Changes to the way individuals and businesses pay tax will follow after that.
It’s a multi-year programme that ultimately will affect everyone who interacts with the tax and transfers system, including tax agents and intermediaries such as employers and banks.
So, all in all 2017 should be a “steady as she goes” tax year for New Zealand.