Tax System for New Zealand’s Future
A Tax System for New Zealand’s Future is the title of the Tax Working Group (TWG) report on reforming the tax system in New Zealand. Released in January 2010 it is well worth a read, even if by selective browsing, as it contains a lot of interesting information and proposals, a number of which are of direct relevance to the investment industry, particularly as they relate to rental properties, land ownership, and equity investments. The full report can be viewed by clicking here http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf, (opens in a pdf file).
One thing that caught a commentators eye was the following "scandalous passage" (p. 17):
"In effect, Working for Families means that households (with children) in the bottom half of the income distribution effectively pay no income tax or receive tax credits, and that most income tax is paid by those people not receiving WfF. The top 10% of income earners now pay 44% of all personal income tax (if the impact of WfF, New Zealand Superannuation and other benefits including the unemployment benefit are included, the top 10% of taxpayers now pay 76% of net tax). Furthermore, fiscal drag (a situation where rising incomes push people into paying higher tax rates over time if there is no change to tax thresholds) means that about 9% of income earners are now paying the top tax rate (compared to about 5% in 2000). Fiscal drag also means that New Zealand’s revenue base will be increasingly reliant on personal taxes and these taxes, along with corporate taxes, are the most damaging for growth."
He argues that this passage outlines in a nutshell what the obstructions are to working harder to get ahead in this country and why so many skilled and talented New Zealanders pack up and go overseas. One can see why these people might object to having so much of what they earn confiscated to fund the reproductive activities of non-taxpayers.
Others would argue that WfF is necessary to provide New Zealand families a minimum level of income to enable the children to grow up to be productive members of our society and that until employees are paid a fair wage for a days work WfF will continue to be necessary. Food for thought!
We urge you to read the full report but for your convenience a copy of the recommendations from the Summary section pages 10 - 11 of the report. is reproduced below:
The TWG believes the problems with the current tax system are such that it requires significant change. The structure of the tax system needs to be significantly improved by making changes that involve a combination of changes to the tax bases and tax mix, to tax rates, and by improving some of the supporting tax rules. The main recommendations of the Group are:
Website source: http://www.victoria.ac.nz/sacl/cagtr/pdf/tax-report-website.pdf
- The company, top personal and trust tax rates should be aligned to improve the system’s integrity. If at any time this is no longer feasible due, for example, to global pressure causing the company rate to reduce, at the very least the trustee rate, top personal tax rate and top rate for portfolio investment entities (PIEs) and other widely-held savings vehicles need to be aligned, accompanied by the introduction of suitable fiscal integrity measures.
- New Zealand’s company tax rate needs to be competitive with other countries’ company tax rates, particularly that in Australia. Balancing this factor against the integrity benefits of a fully aligned system will guide choices between an aligned and non-aligned system.
- The imputation system should be retained. However, this may need to be reviewed if Australia decides to move away from its imputation system.
- The top personal tax rates of 38% and 33% should be reduced as part of an alignment strategy and to better position the tax system for growth. Where possible, the Group would like to see a reduction in personal tax rates across-the-board to ensure lower rates of tax on labour more generally. This could be achieved as part of a package to compensate for any increase in GST.
- Base-broadening is required to address some of the existing biases in the tax system and to improve its efficiency and sustainability. Base-broadening is also required if there are to be reductions in corporate and personal tax rates while maintaining tax revenue levels.
- The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT). While some view this as a viable option for base-broadening, most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.
- The other approach to base broadening is to identify gaps in the current system where income, in the broadest sense, is being derived and systematically under-taxed (such as returns from residential rental properties) and apply a more targeted approach. The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk-free rate.
- Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.
- The following targeted options for base-broadening should be considered for introduction relatively quickly:
- Removing the 20% depreciation loading on new plant and equipment.
- Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value.
- Changing the thin capitalisation rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.
- GST should continue to apply broadly. There should be no exemptions.
- Most members of the Group consider that increasing the GST rate to 15% would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment. However, any increase in the GST rate would need to be accompanied by compensation to those on lower incomes. This would significantly reduce the net revenue raised from a higher GST.
- There should be a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.
- Government should introduce institutional arrangements to ensure there is a stronger focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when tax changes are proposed."
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