What’s on the tax policy agenda?

Tax Alert - August 2021

By Robyn Walker

What do residential properties, fringe benefit tax, free trade agreements, COVID-19, multinational corporations, social unemployment insurance and wealth all have in common? They’re all included on the Governments freshly released Tax Policy Work Programme (“the work programme”).

The release of the work programme signals to stakeholders in the tax system what changes may be coming over the next 18 months. As is standard, the work programme includes more work than can reasonably be achieved, and carries over a number of items from the last work programme which had not been completed.

What to expect

The general theme of tax reform since the 53rd New Zealand Government was formed has been one of tax increases and integrity measures, and that is set to continue through this work programme.

Prior to Christmas 2020 we saw a new 39% tax rate introduced for individuals, which took effect from 1 April 2021, and increased disclosure requirements for trusts. In the work programme, resources are to devoted to “integrity measures to support the 39% tax rate and data collection of trust information” as well as “research work by Inland Revenue involving the collection of information on the level of tax paid by high wealth individuals”.

Also under the integrity workstream, the work programme proposes work on a new “Tax Principles Act” which is intended to establish “a reporting framework against a set of principles to measure fairness of the system”.

In March 2021 announcements were made about a raft of changes to the taxation of property. Unsurprisingly the work programme will have many resources devoted to designing and legislating these rules. The work programme confirms the timelines for this work: “the final policy design of the interest limitation rules and the legislation will be released publicly before 1 October 2021 and enacted into law by 31 March 2022”.

The progress at the OECD in reaching consensus on the taxation of the digital economy will have a consequential effect of draining New Zealand’s tax policy resources to implement the two-pillar OECD tax package. Also included within the International Tax workstreams is continued consideration of a digital services tax, double tax agreement negotiations (New Zealand is currently negotiating with a number of counties), taxation of the gig and sharing economy and a review of tax for cross-border workers (we expect something soon on this last item).

With Inland Revenue’s Business Transformation project almost at an end, consideration is now being turned to maximising the benefits of the computer system. To this end, work will be undertaken preparing a “Green Paper” on Tax Administration. We understand this paper is likely to be published in the first half of 2022.

The Accounting Income Method (AIM) of paying provisional tax has had extremely low uptake since it was introduced in 2018; most likely due to its high complexity (despite only applying to small taxpayers). The work programme includes the continuation of a project from the last work programme, being to review and simplify AIM.

With the Minister of Revenue, Hon David Parker, also being the Minister for the Environment, it perhaps no surprise that the work programme proposes work on the impacts of tax on the environment. Included within this workstream is a review of existing tax provisions to ensure they are not biased against environmentally-friendly investment and behaviour.

Inland Revenue will be undertaking a stewardship review of the Fringe Benefit Tax (FBT) regime. This review will consider whether the FBT regime is still fit for purpose and will inform decision making about whether policy changes may be required. Given the issues arising from the top FBT rate increasing to 63.93%, the confusion around how FBT applies to utes and other common issues with the regime we agree it is time this tax was given a makeover.

The tax system doesn’t work in isolation, and tax can touch many things, so the work programme reflects that tax policy resource will be spent on other Government policies and priorities, including:

  • Welfare reform
  • A social unemployment insurance scheme
  • Any necessary COVID-19 response measures
  • Local government reform
  • Three waters project
  • R&D tax credit
  • Free trade agreements
  • Tax consequences of deposit takers
  • Charities review

In addition to the above, the work programme includes some resource to be spent “maintaining the tax system”. This means dealing with remedial tax issues as they arise, correcting errors and responding to changing technology and business practices.

What’s missing?

With the Crown financial position and additional debt taken on due to COVID-19 being top of mind, it is perhaps not surprising that many of the items above seem likely to ultimately result in an increase in tax collections. However, while the need to increase tax revenues is inevitable, what the work programme seemingly lacks is an ambition to make life simpler for taxpayers. The previous work programme included a wide range of business-friendly initiatives and acknowledged that reducing compliance costs directly impacts (positively) on productivity. Subject to where the conclusions on the FBT review land, there seem to be very few measures which seek to reduce compliance costs and grow tax revenue through improved productivity, instead the focus remains on continuously expanding what is in the tax base.

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