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Tax Working Group Chairman Michael Cullen on taxing capital gains, environmental taxes, incentives for retirement savings & applying GST to financial services

Tax Working Group Chairman Michael Cullen on taxing capital gains, environmental taxes, incentives for retirement savings & applying GST to financial services
Michael Cullen.

Tax Working Group (TWG) chairman Michael Cullen says it's not safe to assume the government appointed group will recommend extending the taxation of capital income in some form in its final report.

The TWG released its interim report on Thursday, saying it has decided to work "in substantial detail" through the policy choices involved in the design of an extended taxation of capital gains, or income.

Two main options are under consideration being; an extension of the existing tax net through the taxation of gains on assets that are not already taxed; and the taxation of deemed returns from certain assets known as the risk-free rate of return method of taxation. The interim report says the TWG has made good progress in determining what income might be included from certain assets, and when this income might be taxed, but still has much work to do.

Cullen told that despite the options on the table, it's not safe to just assume some sort of new capital gains tax will be recommended in the TWG's final report, which is due in February.

"I don't think it's safe to assume that's definitely the case," says Cullen.

There's still a lot of work to do he says, including weighing up the costs and benefits of such a move.

"We still have a lot of detail to work through. There's still a lot of questions to be asked and we've yet to get feedback on some of the answers we've already given, which may give us pause to think again about some of those," Cullen says.

"So it's not a foregone conclusion at this point at all."

Finance Minister Grant Robertson issued a letter to Cullen after the release of the interim report. In it Robertson requests the TWG's final report examines whether a tax on realised gains, or the risk-free rate of return method of taxation, or a mix of both, is the best method for extending a potential capital income tax on specific assets - with the goal of ensuring New Zealand's tax system is fair and balanced. 

For the final report Robertson has also asked the TWG to include measures that could result in a revenue neutral package.

A carrot and stick approach for farmers

The interim report delves into environmental taxes in some detail. It notes New Zealand is ranked 30th out of 33 OECD countries for environmental tax revenue as a share of total tax revenue. It also notes agriculture's presence outside the Emissions Trading Scheme (ETS), and says the TWG is aware of "a number of existing tax concessions for agriculture in the Income Tax Act."

Asked about this Cullen says the key issue is how to move to a fully sustainable economy quickly. He says carrots and sticks ought to be offered to ensure NZ gets ahead of international competition and has a marketing edge around sustainable agriculture production that the country currently lacks.

"So much work has gone into the Emissions Trading Scheme that our preference is to stick with it, continue the process of improving it...but also ensure there's a solid floor to that Emissions Trading Scheme, which will perhaps rise over time so that there's a real incentive upon farmers to switch to more favourable modes of production, more sustainable management systems around that, and also things like looking at nitrate taxes."

"I would make the point very strongly that I think it's important that revenue is substantially recycled back into primary sectors to accelerate the ability of farmers to make those changes," says Cullen.

More to come on savings incentives?

Elsewhere the TWG is recommending a package of "modest incentives" for retirement saving targeted at low and middle-income people.

The recommendations are that the Government;

1) Remove employer superannuation contribution tax (ESCT) on the employer’s matching contribution of 3% of salary to KiwiSaver for members earning up to $48,000 per year. 

2) Implement a five percentage point reduction for each of the lower PIE rates, applying to savings in KiwiSaver accounts. 

3) Consider ways to simplify the determination of the PIE rates, which would apply to KiwiSaver.

4) Says it will give further consideration to the taxation of savings in its final report, in light of its broader conclusions on the tax system.

Cullen says the TWG may ultimately push the boat out further in this area depending on what it recommends around capital income taxation.

'Banks aren't charities'

Meanwhile, Cullen says it's fair to say the TWG has had a good look at applying GST to financial services and wants to do so, but isn’t sure how to. 

"Absolutely. There's no really efficient method of doing it which doesn't have a lot of countervailing or negative factors come into play."

"Banks aren't charities. If you levy a tax on transactions they will pass those costs onto their clients, but may well pass it on in such a way that they favour their larger clients because obviously they're their most valuable clients, they're the ones they most want to keep. So it would actually end up being a regressive tax on expenditure, or even on income which is not what people think it is. They think it's taxing banks. But [you] end up actually taxing pretty much anybody, but possibly taxing people more proportionately on low incomes than those on very high incomes and large corporates," Cullen says.

The interim report says there's a strong "in-principle" case to apply GST to financial services, but there are no obviously feasible options for doing so, concluding the Government should monitor international developments in this area. In terms of financial transaction taxes the report says these are inefficient and unlikely to raise significant revenue for NZ. The Government ought to monitor the international debate, but the TWG doesn't recommend the introduction of such a tax at this point.

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Fair and balanced?
How is it fair and balanced to consider taxing the people who currently pay the most tax, even more?
Then the ones who are on benefits contribute zilch!

The COL need lots and lots of cash to pay for their "fair" policies and to meet the excessively heightened expectations they will eradicate poverty. The Man, here in nz we have no idea what is actual poverty. The JNS Filipinos, some may think their style is far fetched, grew up in terrible poverty and used it as a springboard to also get themselves out of it to make a better life. Watch "Junior New System JNS Filipinos

Haha people’s idea of fair seems to change more based on whether they are the recipient or not. Flexible morals.

Because you start from a flawed assumption. I would be interested in how you came to your short sighted conclusion, what income streams did you consider when you made your ill thought out comment? If you want a comprehensive and fair tax policy you have to include all forms of income, including those that are currently unearned. It is typical of right wing thinking to want their slice of the pie to be protected against paying their fair share.

The people who pay the most tax on total income are PAYE payers. Considering the tax changers are meant to be revenue neutral, I’m guessing they will receive a nice tax drop. Sounds pretty fair to me.

Who do you think is going to pay lower tax?

One figure from that article, “the top 3 per cent of individual income earners, earning more than $150,000 a year, pay 24 per cent of all tax received”. Do you think the COL will reduce their burden? I’m guessing they have assets the troughers will target for more tax.

Currently we tax the fruit but not the trees.

Once you realise these gains from the sale of an asset, why should that income not be taxed ? In the case of property, all you have done is had the good fortune to buy something that increased in value while you sat on your arse.

More like foregone instant gratification in favour of saving/investing.

I'm not sure people who are paying down mortgages are 'sitting on their arses'. In a rental situation, that interest would have been deductible. If I'm going to be taxed as if an asset was purchased for the intent of resale then I'm going to want the cost of obtaining and financing the asset (which I have not received a deduction for like I would for a rental) to be included as a capital cost. Otherwise give me a deduction for it year-on-year like any other financed asset in a business where profits are taxed.

Dr Cullen speaks but what he says is never unambiguous. This allows him to do a 180 at any necessary moment. Nothing personal about that, he is but a typical politician, well versed and adept at the game. But going back a bit, the rapidity with which he jumped from one side of the fence to the other, during the wine box enquiry, was very athletic.

Indeed. My own take on the TWG stems from the leetle gem secreted away in this section (P150-1, reproduced in full, my bolding)

V How to tax
Tax on capital gains continues to be imposed as income tax and is not a new, different, tax

80. Implicit in the Group’s approach is that the income brought into the tax base by taxing more realised capital gains should be taxed in the same way as any other income, unless there is some reason to do otherwise. The rules taxing more capital gains can be seen as no more than expanding the definition of what is a revenue account asset, albeit in a reasonably far-reaching manner.

81. This means:
• taxing income from the realisation (or deemed realisation) of included assets at the person’s usual marginal rate, with no indexation for inflation;
• collecting that tax in the same way as income tax is currently collected.

82. This is a key aspect of the Group’s design. The proposed design retains the new rules within the existing legislative framework contained in the Income Tax Act 2007 and the Tax Administration Act 1994. This means that:
• there is no need to draft an entirely new set of tax legislation;
• in many respects, existing law will provide all the detailed supporting provisions and mechanisms that are required for the tax to operate;
• the tax will be calculated and collected in a way that is already familiar to taxpayers and advisors;
• existing law may be able to be simplified, once the majority of asset disposals are taxable.

For example, it may be possible to repeal the sections defining when sales of land are taxable, once all sales of land other than the excluded home are taxable.

In other words, if no new legislation is needed, then it is possible to say, with a straight face, that there are No New Taxes. And as most Acts already have a clause that reads something like this:

'If we have a rush of blood to the head (or other parts) and need to ginny up some minor changes to the bits of this here Act that are getting in the way, we have the Power to do just exactly that, by lunchtime, via Order In Council and a Gazette notice. So there, suckaz!',

Then those changes to existing legislation can be done quickly and with minimal public notice or consultation. After all, who ever reads the NZ Gazette?

For an example, consider where the definition of 'Income' is located - and how easily it could be extended......

We kind of have that, don't we? "Ordinary concepts" is about as broad a brush as you can imagine.

Michael Cullen is fibbing when he says its not a foregone conclusion that he will recommend CGT

Luckily , we have Winston Peters in the mix and he will never go along with it

Boatman, I wasn’t sure about your voting choice at the start, and I would rather have National in power, but you got the utility out of your choice. Labour and the Greens have been nicely curtailed.

Jacinda's Capital Gains Levy ???

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Days to the General Election: 36
See Party Policies here. Party Lists here.