Overview

By Patrick McCalman and Robyn Walker

With two tax working groups having reviewed and reported on the state of the tax system already this century, it is perhaps unsurprising that this year’s Tax Working Group’s (TWG) Interim Report makes few concrete recommendations for change in our tax systems at this juncture.  In the same vein, it is also unsurprising, given its interim nature, that those changes being recommended in the report are more micro in focus and that the more macro challenges, such as the taxation of capital, is still a work in progress.  However, the Interim Report is useful in raising a number of issues which, if the TWG is to be judged as “successful”, will need to be concluded in the final report scheduled for release in February 2019.

The Interim Report provides a glimpse as to where the TWG’s recommendations are heading. Refer to our “TWG decisions at a glance” summary for a snapshot of what has been recommended, dismissed, deferred to someone else or identified as needing to be worked on further by the Group.

The most highly anticipated aspect of the Interim Report is in relation to the taxation of capital. The report doesn’t give a view either way at this stage, but instead provides comprehensive coverage of the issues which need to be considered if New Zealand moves to have more comprehensive taxation of capital income. The report is clear that there is more work to be done before a conclusion can be reached, including considering flow on impacts for savings and the Māori economy as well as considering issues such as blackhole expenditure and building depreciation.  But, given the level of detail provided on areas for further work, it seems likely that introducing this type of tax would result in significant added complexity to the tax system. This raises an obvious question as to whether there is an adequate trade-off from expected revenue collected versus compliance costs added, and whether more targeted rules specific to identified “problem” areas like property would be a more effective and politically palatable solution.

With not many firm conclusions, the Interim Report leaves us hanging until early next year as to what the future of the tax system could look like and what all the options and trade-offs will be. A key question for business will be what is in the final report to offset any potential additional taxes or additional compliance costs that may arise from the recommendations. In this respect, there has already emerged one clear recommendation: that the company tax rate should not fall from the current 28 percent rate. Given the global lowering of corporate tax rates (New Zealand is now the 7^th highest in the OECD), if this is the direction of travel to be chosen, it is important that other initiatives are explored to ensure that New Zealand remains an attractive place to do business.

Things that we would like to see given more consideration in the final report include:

1. More emphasis on initiatives that encourage the economy to grow, with increased tax revenues flowing from that growth, rather than just taxing existing economic activity harder. A key focus should be on what can be done to help New Zealand be more productive and grow, rather than being drawn into the micro base maintenance concerns that have dominated recent policy deliberations.
   
2. New Zealand is reliant on foreign capital and New Zealand’s tax rules need to be designed to not only tax capital, but also to attract and retain the capital needed for growth.  As our corporate tax rate trends up to be well above average, we need to ensure that the tax burden on business (including any new taxes) does not dissuade investment.
3. The taxation of savings also needs to be considered, especially as a strong domestic savings pool provides a potential source of capital for New Zealand business to grow.  New Zealand is an outlier in following a Tax-Tax-Exempt (TTE) model and steps should be taken to reduce taxes at the investment and earning stages of the savings cycle for all taxpayers. At this stage there are some modest proposals to reduce taxes for the lowest income earners, but with the potential for some form of capital taxation to emerge from the final report, the final outcome may end up being more net taxes on savings.

We hope this special alert is useful in helping you to navigate this Interim Report from the TWG, and that our insights provide food for thought on what could eventually become the biggest tax changes in recent memory.