Having read and given the 194-page interim report from The Tax Working Group (TWG) the 'sleep on it' test - here's where we landed:
The report claims it is for a national conversation about tax. If this is true, it appears to be a one-sided conversation. The interim suggestions are anything but taxpayer friendly, nor do they promote or support business growth and regional investment, which future-proofs New Zealand in so many regards.
What is missing from the report is how tax can support New Zealand businesses, a positive outlook on what New Zealand businesses want to achieve, and how tax can be leveraged to support these objectives.
Most New Zealand businesses set out to have sound business models and proper working capital cycles to meet their obligations to pay employee wages and their fair share of tax. Why did the TWG not consider lowering the corporate tax rate outside of Auckland, Wellington, and Christchurch to encourage investment in the regions and relieve the pressures on infrastructures? Furthermore, the report does not seem to raise how we can encourage our best and brightest to stay in New Zealand.
Put simply, the interim report is an opportunity lost.
The report provides commentary as to what the TWG has been working through, and it is pleasing to see the following recommendations:
- No financial transaction tax.
- No change to the GST rate or introduction of exemptions.
- No wealth tax.
- No land tax.
Furthermore, there’s no signal that the corporate tax rate or imputation rules will change.
What has been left in for consideration is:
- Extending capital gains tax.
- Environmental taxes.
- Tax exemptions and GST in the Charitable sector.
- Moving the personal marginal tax rates and brackets.
The key policy issue flagged in the report was extending capital gains that are subject to taxation. So, in a sense, asset classes that are not currently taxed will be taxed. To be clear, this extends beyond property—this affects asset classes such as shares in businesses and intellectual property, but not your family home or other personal assets such as fine art. In short, if you have an asset class that is presently untaxed, this may change.
The two proposals around how to tax capital gains are either to extend the type of assets subject to ordinary taxation on a realised basis, or on an unrealised basis. On an unrealised basis means that the Government gets your money based on a paper gain, when you have no money in your bank account. This proposal should be dispatched straight away as it is not fair on taxpayers to cough up tax when they have not made a cash profit.
Regarding the proposal to tax on a realised basis, the complexities of the roll-over provisions need to be worked through. Under roll-over provisions, your capital gains tax liability could be deferred under a whole range of circumstances, such as a roll-over on death when an asset is distributed. The devil will be in the detail, which is yet to come. The key problem with this proposal is that taxpayers will be encouraged to “lock in” assets, which, in a sense, means estate planning is going to become more important.
The TWG has acknowledged that any change to the taxation of capital gains is going to increase the complexity of tax compliance for all taxpayers. If the roll-over relief rules are fully implemented, this could become more of a paper shuffling exercise for most. This would be the best outcome, but at some stage, someone will need to pay the taxman.
As the TWG have said, they will be consulting stakeholders on the interim report, and they have requested further submissions.
Bellingham Wallace will be running a series of workshops that consider the interim report in more detail. If you would like to be part of these, please contact your Bellingham Wallace advisor.
