Revenue Minister Stuart Nash says he’s looking forward to discussing the Tax Working Group’s findings with NZ First and the Greens.
He made the comments in a speech to the International Fiscal Association’s NZ Branch Conference in Queenstown.
In his address Nash outlines a number of key priorities the government is looking at in the tax realm in 2019, including its response to the Tax Working Group’s findings, how to tax the digital economy, changes to the Charities Act and environmental taxation.
Tax Working Group
The Tax Working Group released its findings on February 21 and recommended, amongst a number of other proposals, a broad based capital gains tax that would kick in when an asset is sold or changes hands. This would be applied with no discounted tax rate and no allowance for inflation. Gains would be calculated from when the new legislation comes into effect. The report estimated that broadly taxing more income from capital gains would raise approximately $8 billion over the first five years.
And while Nash didn’t divulge any details on the government’s thoughts on the working group’s report, he will have his work cut out between now and April when the government releases its official response.
“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. It’s important that government takes due care when coming up with a considered response,” Nash says.
“It deals with a number of complex issues in significant detail and we want to get our heads around it, and get some preliminary advice from officials, before we publish the Government’s response in early April.”
He’s keen to emphasise that the Tax Working Group’s recommendations aren’t binding on the government.
“The government will need to review the report thoroughly and seek advice from Treasury and Inland Revenue before making any decisions. But just be aware: there is a substantial process that includes Cabinet approval of any recommendations, let alone the legislative process framework before anything can be implemented. The government expects to release a full response in April 2019 following detailed discussions with officials and consultation between Government parties.
“If the Government does decide to make changes to the tax system, these changes will be made by introducing legislation. This means the changes will go through a full select committee process, where members of the public will have the opportunity to submit on and influence the shape of the Bill.
Ring-fencing residential property losses
Nash says property investors using loss making rental properties (homes) to reduce their taxes on other income are also now in his sights.
He says it’s an important issue the government is seeking to address this year.
“In terms of what we’ve got on the boil, we’ve introduced legislation to ring-fence residential rental property losses. Currently, investors with loss-making rental properties can reduce tax on other income, which helps them outbid owner-occupiers for properties. Yet these investors often make tax-free capital gains when these properties are sold.
“In conjunction with the extension to the bright-line test, ring-fencing losses from rental properties would level the playing field between property investors and home buyers.”
Digital economy and the OECD’s response
Nash says the need to come up with an international tax framework to address the growth of digital business is another pressing issue on this year’s agenda.
“There has been a lot of concern lately with the under-taxation of the digital economy. I share this concern. The main issue is that the international income tax framework has not kept up with modern business practices, particularly digitalisation. Fixing this framework requires some level of international consensus.”
He says a number of countries are involved in a proposal before the OECD to address the issue. This includes a plan for more taxing rights to individual countries.
“This would apply regardless of whether a multinational has a physical presence in the country. The second measure is a minimum tax on profits earned in low tax jurisdictions, which is supported by France and Germany. The OECD is aiming for G20 approval of its preferred proposals in June 2019 and countries have committed to reaching a consensus by 2020. We are hopeful that this can be achieved, but there are no guarantees. There are still some countries that do not think any changes are necessary or want one kind of solution over another.”
Charities Act changes
While another issues closer to home that Nash says he’s keen to see addressed is the taxation of charities, which he says was included the Tax Working Group work.
“I’ve always been hot on this. In my mind, ensuring the tax obligations of charities’ commercial interests are treated appropriately is really important to the overall integrity of the tax system.
“Giving tax breaks to some commercial operators, who have a charitable owner, and not others potentially has a distortionary effect on the market that they operate in, in that privately-owned entities often compete in the same space.
“The Tax Working Group also picked up on this in their report. They also note, however, that the underlying issue is the extent to which charitable entities are accumulating surpluses rather than distributing or applying those surpluses for the benefit of their charitable activities.”
He says it’s a complex issue the government is looking at and referred to a Department of Internal Affairs discussion document released last week which is looking at how to bring the Charities Act into the 21st century. Nash says submissions on it close on April 30.