What is next for the tax system?
Tax Alert - May 2019
By Robyn Walker
On 17 April 2019, the New Zealand government announced the decisions it had made on the 99 recommendations of the Tax Working Group (TWG). At the heart of the TWG recommendations was the introduction of a capital gains tax (CGT), with the government categorically ruling this recommendation out.
With the central pillar of the TWG recommendations ruled out, some commentators have been quick to label the whole TWG process as a waste of time and money. However this is not the case, as we are still left with valuable insights as to the health of the tax system and areas for improvement (outside of CGT). Even the work on a CGT is not wasted, as the report provides a real insight into the extent and complexity of the issues that a CGT would have to address, which would be useful reading for anyone that may, at some future time, raise the CTG question again.
More importantly, however, is that outside of the CGT question the TWG had made a wide range of recommendations, and
we are fortunate that the government has been very decisive in responding to all of the recommendations. We now have a clear view on what is or is not expected to progress and now we will likely see a bit of jostling for prioritisation of the remaining recommendations. Obviously without a new major revenue source, the ability to introduce tax cuts, concessions, or improvements with a significant fiscal cost is impeded.
What are we likely to see progressing in the near term?
Of the TWG recommendations, the government put them into five buckets:
1. Endorse the TWG recommendation – essentially these were things where the TWG said something was working well already; i.e. no change required
2. Agree nothing further needs to be done
3. Note that work is already underway – these are things where perhaps there was an overlap with existing policy work or where work had begun to progress regardless of the TWG outcome
4. Consider for work programme – these are things that will be considered when developing the next tax policy work
programme in mid-2019, or the work programme of other government agency
5. Consider as a high priority for work programme – these are the things that we may be more likely to see included on the work programme
Of these categories, we would expect to see work continue on items in 3, expect work to start on items in 5, and hope to see work on items in 4 but perhaps on a longer time horizon.
So what falls in each bucket? We outline below some of the key items. The full set of recommendations is available on the Inland Revenue website.
Items that will continue to be worked on
- A large number of items under environmental and ecological outcomes are already under active consideration by non-tax agencies
- Ensuring international tax rules are taxing multinationals appropriately, including participating in OECD discussions and consulting on digital services tax (a consultation document is expected in May)
- Work to ensure that self-employed workers are aware of, and complying with, tax obligations, and work on extending withholding taxes in order to increase compliance
- A review of charities and non-profit organisations
Items to consider as high priority for the tax policy work programme
- Allowing deductions in some form for seismic strengthening work
- Developing a regime that encourages investment into nationally-significant infrastructure projects
- A review of loss-trading
- Tightening rules around closely-held companies, including where tax debts are owed
- Consider taxing vacant land held by land-bankers; this would be a local government initiative rather than central government
- Repeal aspects of the land sale rules that negatively impact on land supply
- Increase IRD number disclosure requirements when selling any residential property
Items to consider for the tax policy work programme
- An exemption from fringe benefit tax for public transport
- A review of specific concessions for farming, forestry and petroleum mining to ensure there are not concessions for activities that harm natural capital and to consider concessions that could enhance natural capital
- Extend the 17.5% tax rate that applies to Māori authorities to subsidiaries and consider technical refinements to the rules
- Change the loss continuity rules to support the growth of innovative start-up firms
- Reform the treatment of "blackhole" expenditure to allow spreading of deductions over five-years and a NZD 10,000 de minimis rule for automatic deductions
- Consider restoring depreciation deductions for certain buildings
- Consider a range of 18 options to reduce business compliance costs
- Consider the additional tax concessions recommended by the TWG that will be considered as part of the work the government already is doing on KiwiSaver enhancements
- Explore options to widen the gap between the company tax rate (28%) and the top personal tax rate (33%); noting that the government endorsed the recommendation of the TWG to not lower the company tax rate
- Consider a truncated disputes process for small taxpayers
- Consider limiting the GST concessions that apply to not-for-profit organisations
CGT invoked very passionate responses either for or against it, and some will be very pleased to see this policy ruled out. Whatever one's view on CGT, what is of most value is that we now have very clear guidance on where tax policy resources likely will be spent going forward. Now we can get on with the business of consulting on the remaining proposed changes, rather than continuing to speculate.