Tax working group: summary of recommendations

While the Tax Working Group’s (TWG) much anticipated final recommendations don’t dramatically deviate from its interim report, a deep dive into the details might reveal measures that, if implemented, will significantly impact New Zealand businesses.

Watch this space for more in-depth commentary in the lead up to Government’s recommendations in April; in the meantime, here’s a summary of the Group’s report.

The taxation of capital gains

While they did not recommend introducing wealth or land taxes, all members of the Group agree that there should be an extension of the taxation of capital gains from residential rental investment properties; it recommends:

• including gains and most losses from all types of land and improvements (except the family home), shares, intangible property and business assets.
• recommends not including personal use assets (such as cars, boats or other household durables).
• that the existing rules continue to apply to foreign shares that are currently taxed under the fair dividend rate method of taxation, as well as anything taxed under the financial arrangement rules.
• only taxing gains and losses that arise after the implementation date (Valuation Day).
• the tax be imposed on a realisation basis in most cases.
• rollover treatment for certain life events (such as death and relationship separations), business reorganisations and small business reinvestment.
• no discount for capital gains and no adjustment for inflation.

The taxation of business and savings

Business and productivity

• The TWG suggests the Government continues to monitor company tax rates around the world, particularly in Australia, and recommends against introducing a progressive company tax
• The Group has recommended a number of measures to enhance productivity, some or all of these could form part of a tax reform package:
  • Changes to the loss continuity rules to support the growth of innovative start-up firms
  • Expanding deductions for ‘black hole’ expenditure
  • Concessions for nationally significant infrastructure projects
• Restoring building depreciation decurions was also assessed, and the Group concluded that the Government could achieve this if capital gains tax is extended
• In terms of the treatment of multinationals and digital firms, the Group recommends that the Government stand ready to implement an equalization tax on digital services if a significant number of other countries do the same
• The Group also submitted the following suggestions for immediate action:
  • Increase the threshold for provisional tax from $2,500 to $5,000 of residual income tax.
  • Increase the closing stock adjustment from $10,000 to $20,000-$30,000.
  • Increase the $10,000 automatic deduction for legal fees and potentially expand the automatic deduction to other types of professional fees.
  • Reduce the number of depreciation rates and simplify the process for using default rates.
  • And subject to fiscal constraints, the Group the group suggests simplifying the fringe benefit tax and the entertainment adjustment (or even remove this adjustment altogether).

Retirement savings

To encourage people to save for retirement, an increase in the tax benefits for low and middle income earners through KiwiSaver is supported by the Group; it also believes there is a case to exempt the New Zealand Superannuation Fund from New Zealand tax obligations.

Personal income taxation

The Group’s preferred approach in this area is to increase the bottom tax threshold, however a material reduction in personal income would require broader income tax changes, including an increase in the top marginal rate (this change is beyond the scope of the Group’s Terms of Reference).

Potential packages for tax reform

A broad extension of the taxation of capital gains is projected to raise approximately $8.3 billion over five years. The revenue is expected to increase over time, rising to a long-run average of 1.2% of gross domestic product (GDP) per annum, but it will also be volatile. This has led to Ministers directing the Group to develop revenue-neutral packages of tax reform for the Government’s consideration.

Matters requiring significant attention by Government

The future of work

The Group supports Inland Revenue’s efforts to increase the compliance of the self-employed. They also recommend expanding the use of withholding taxes to increase compliance, and that withholding tax be extended as far as practicable so long as it does not create unreasonable compliance costs.

The integrity of the tax system

• A clear need for Inland Revenue to strengthen the enforcement of rules for closely held companies was highlighted in the final report.
• The TWG also suggested establishing a single Crown debt collection agency, to achieve economies of scale and more equitable outcomes across all Crown debtors.

The administration of the tax system

• A need for greater public access to data and information about our tax system and the distribution of wealth in New Zealand is recommended by the TWG.
• It also recommends the establishment of a taxpayer advocacy service to assist taxpayers in disputes with Inland Revenue, and that the Office of the Ombudsman is adequately resourced to carry out its duties.

Matters requiring further work

Charities

• The TWG recommends that the Government periodically review the charitable sector’s use of what would otherwise be tax revenue to ascertain if intended social outcomes are being achieved.
• In terms of private charitable funds and trusts, the Group says that the Government should consider whether to apply a distinction between privately controlled foundations and other charitable organisations, to remove concessions for privately controlled foundations or trusts that do not have arm’s length governance or distribution policies.

GST

• The Group decided not to recommend a reduction in the GST rate or the introduction of new GST exemptions.
• It also does not recommend introducing a financial transactions tax at this point.