Here we wrap up all the comment directly from the Tax Working Group itself and the initial response from the Government, as well as referring to the minority view of three members of the group.
So, with no more preamble, we start with the release from the TWG:
Tax Working Group delivers Final Report
Concerns about the structure, fairness and balance of the tax system have led to the Tax Working Group recommending the Government tax more income from capital gains.
Group Chair Sir Michael Cullen says our system has many strengths but there is a clear weakness caused by our inconsistent treatment of capital gains.
“New Zealanders earning just salary and wages are taxed on their full income but we have several situations where you can earn income from gains on assets and not be taxed at all.
“All members of the Group agree that more income from capital gains should be taxed from the sale of residential rental properties. The majority of us on the Group, by a margin of 8-3, support going further and broadening that approach to include all land and buildings, business assets, intangible property and shares.
“We have judged that the increase in compliance and efficiency costs is worth it if we can reduce the biases towards certain types of investments and improve the fairness, integrity and fiscal sustainability of the tax system.”
The Group recommends that a tax on capital gains would kick in when an asset is sold or changes hands and would be applied with no discounted tax rate and no allowance for inflation. Gains would be calculated from when any new law comes into force.
Three members prefer for this to apply only to residential rental property.
Sir Michael says the Group has presented the Government with choices and options rather than a rigid blueprint.
“The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains. It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time. It may decide to apply the deemed return method to property. All these options are open to the Government.”
The Tax Working Group estimates that broadly taxing more income from capital gains will raise roughly $8 billion over the first five years.
“If the Government chooses to proceed down this path, it then unlocks opportunities to reduce taxes in other areas so we have given them some options to consider,” says Sir Michael.
Lowering personal income tax
The Group has investigated a range of reductions in personal income tax. Its preferred approach is allowing New Zealanders to earn more at the lowest tax rate of 10.5%. This would reduce income inequality, benefit all full-time workers, and support those transitioning into work.
The Group has identified a range of measures to encourage saving, targeting those at lower- and middle-income levels. These include refunding the Employer Superannuation Contribution Tax (ESCT) for KiwiSaver members earning less than $48,000 a year and cutting the KiwiSaver tax rates for low- and middle-income savers.
These reductions would mean that this group would pay less tax overall on their KiwiSaver, even if the income from capital gains on their accounts is taxed.
The Group sees the current approach to the taxation of business as largely sound and sees no case to reduce the tax rate or introduce a progressive scale for companies. However, it is recommending measures to help businesses to grow, be more productive and lower what they spend complying with our tax rules.
“Deliberations over extending the taxation of capital gains have taken up a considerable amount of time but our final report is about far more than that single issue,” says Sir Michael.
“The report has a strong focus on the environment and recommends better use of taxes to discourage activities that cause negative impacts. We have developed a framework for deciding when such taxes can be best applied.
“Transitioning to a more sustainable economy is a long-term project but we are recommending to Government that increasing the rate and scope of the Waste Disposal Levy; strengthening the Emissions Trading Scheme; and using congestion charging on our roads should be immediate priorities.”
Enhancing the integrity and administration of the tax system
The Group has recommended a number of measures to safeguard the integrity of the tax system and improve its administration, which it thinks should be implemented regardless of whether a tax on more income from capital gains goes ahead.
• Increased enforcement of closely-held companies as there appears to be a set of integrity issues around their tax affairs.
• Inland Revenue’s crackdown on the hidden economy could be strengthened with the introduction of stricter reporting requirements.
• A single Government debt collection agency should be established to achieve economies of scale and fairer outcomes for New Zealanders who owe money to the Government.
• A taxpayer advocacy service should be established to help small taxpayers in dispute with Inland Revenue.
• Regular reviews should be conducted of the charitable sector to ensure the tax concessions enjoyed by the businesses they run are being put towards the intended social outcomes.
“The Final Report represents the end of our work on the Tax Working Group but the national conversation we’ve all been having about tax will continue,” says Sir Michael.
“We encourage all New Zealanders to stay involved as the programme of tax reform is developed. Together, we can – and should – shape the future of tax.”
Read the Final Report with supporting videos and factsheets at www.taxworkinggroup.govt.nz.
YouTube links to videos explaining key findings in the Final Report are provided below.
1. Why should New Zealand tax more capital gains - https://youtu.be/_2kQqPH85gc
2. How might taxing more capital gains work? - https://youtu.be/84BdqIK8EF8
3. Tax Working Group suggestions for reducing taxes - https://youtu.be/FZeeSPDhucE
4. How taxes can help the environment - https://youtu.be/KJLCPlbV4e0
The Government has its say
The Government has said it will not make a formal response to the TWG recommendations till April. But it has made some immediate response. Here is that response:
Government response to Tax Working Group report
The Coalition Government will take a measured response to the final report of the Tax Working Group (TWG), Finance Minister Grant Robertson and Revenue Minister Stuart Nash said today.
“We welcome the release of the report and thank Sir Michael Cullen and the TWG for their hard work,” the Ministers say.
“The independent report finds that overall our tax system is clear and simple but there is room for improvement. There is some unfairness that we need to address. We will work through ways to do this to make the system fairer and more balanced,” says Mr Robertson.
“The overall findings confirm that there is no need for a major overhaul of the system,” says Mr Nash. “Our response will preserve the key principles of our existing broad-based low-rate tax system. In the words of the Prime Minister, we will not throw the baby out with the bathwater.”
As the Working Group has said, the Government is not bound to accept all the recommendations it put forward. There are options to accept some, and/or to phase or sequence aspects of the packages proposed by the Group. Both Ministers said it was highly unlikely all recommendations will need to be implemented.
“We will seek technical advice on addressing the unfair and unbalanced elements identified by the TWG and make further announcements in April on any measures to enhance the fairness and integrity of the tax system,” Mr Nash said.
“Our aim is to ensure the system is fair for families and businesses and that it offers balance across the wider economy,” Mr Robertson says.
“We look forward to discussing the recommendations with our Coalition and Confidence and Supply partners as we work to find consensus on the best overall package. We will work to get the balance right,” he says.
“I am also happy to reaffirm the commitment made when the TWG was established that no changes arising from the report will be implemented this term. We also set out some clear bottom lines. In particular, the family home, increases to income tax and GST, and an inheritance tax are off limits and this remains the case,” says Mr Robertson.
Mr Nash also confirmed that tax reform initiatives separate to the work of the TWG will continue in the meantime. “We remain vigilant to ways the current tax system fails to address global economic and social forces which affect economic activity. These deficiencies are being acted on through our existing programme of reform.”
The Ministers noted that the Coalition Government has already moved to restore fairness and balance through a series of business-as-usual reforms:
·Digital Economy. As announced earlier this week we are taking steps to ensure companies in the digital economy who do business across borders pay their fair share of tax. A discussion document on the options for a design of a digital services tax will be released in May, and we continue to work with other countries for a global solution;
·Multinationals. The aggressive tax planning of some multinational companies who do business here has been tackled through the Base Erosion and Profit Shifting (BEPS) legislation which came into force in 2018;
·Bright line test. The previous Government’s bright-line test that determines whether you pay tax on residential property investments sold within two years of purchase was extended by this Government to include those sold within five years;
·Ring fenced losses. Losses on residential investment properties are to be ring-fenced, to remove the ability of property investors to pay less tax on other income;
·Research and Development. We are encouraging innovation and investment by business with a package of R&D tax incentives that come into force from 1 April 2019;
·GST on offshore suppliers. Domestic retailers will finally be on a level playing field with foreign companies who sell low value goods into NZ and don’t collect GST;
·Double Tax Agreements. The ability to detect and prevent tax evasion involving taxpayers who operate in both NZ and offshore jurisdictions is enhanced by DTAs. We have updated the DTA with Hong Kong, a major financial centre in Asia. Updated DTAs with China, Korea and Fiji are also on the Government work programme;
·Hidden economy and tax evasion. We increased the ability of IR to go after tax cheats, especially in the hidden economy, with more funding for compliance and enforcement;
·IR Business Transformation. The BT programme of modernisation within IR makes it easier to eliminate punitive secondary tax for those who hold down more than one job, and to automate tax refunds each year;
·Families Package. Measures in the Families Package targeted low and middle income families including changes to Working for Families;
·Business Advisory Council and Small Business Council. The PM’s Business Advisory Council and the Small Business Council have been tasked to come up with a strategic approach to supporting business across central agencies.
Ministers expect to release the Government’s full response to the Report in April 2019 following detailed discussions with officials and consultation between Government parties.
As previously indicated, it is the Government’s intention to pass any legislation to implement any policy changes arising from the report before the end of the Parliamentary term. No policy measures would come into force until 1 April 2021 – giving New Zealanders the chance to vote on any decisions made by the Government.
The Minority View
As had been previously indicated, the views of the TWG were not unanimous on CGT. Here is a statement from Business NZ outlining the differences:
Minority view on extending the taxation of capital gains
Three of the eleven members of the Tax Working Group do not favour the Group’s recommendations on capital gains tax.
Group members BusinessNZ Chief Executive Kirk Hope, former Bell Gully tax partner Joanne Hodge and former Inland Revenue Deputy Commissioner (Policy) Robin Oliver do not recommend that the Tax Working Group’s proposed capital gains rules should be implemented.
Their view is that administration costs, complexity and investment distortions that will result from the rules would outweigh the revenues that could be gained from a comprehensive capital gains tax as proposed, and it would not significantly reduce overinvestment in housing or increase tax fairness.
The minority group considers that a more limited capital gains tax could be appropriate if focused on rented residential property where most revenue could be raised.
The minority group does not support a capital gains tax on business assets, saying this could discourage investment and innovation and tend to lock businesses into current asset holdings. Concerns with the ‘valuation day’ approach (taxing growth in the value of assets from the proposed commencement date of 1 April 2021) include its vulnerability to conflicting valuations of assets.
The minority group has concerns with taxing both shares and business assets on the grounds that this could create double taxation, penalising New Zealanders owning shares in New Zealand, and making overall taxation on investment less consistent.
The minority group recommends retaining New Zealand’s current relatively simple and efficient tax system while amending some specific current rules and better enforcing others.
The Minority View on Extending the Taxation of Capital Gains is available here