The good

• No GST increase or changes proposed
• Removal of tax (ESCT) on 3% KiwiSaver employer contribution proposed
• Reduction in KiwiSaver PIE rates proposed (top rate currently 28%)
• Simplification of alcohol taxes proposed
• No further tobacco taxes proposed
• A taxpayer advocate service proposed
• Confirmed no tax on family home and no inheritance tax
• Any tax on capital gains would only apply to future gains, and possibly only to assets purchased after the regime is introduced

The bad

• The TWG proposes to keep the company tax rate the same and no reduction for smaller companies

The ugly

• Capital Gains Tax (whether a new tax or via expanding income tax) is still being considered
• One approach would be to tax actual gains, but an alternative option being considered is the expansion of the risk-free rate of return method, e.g. each year 5% of the market value of the asset is taxable income (probably reduced by rent or other income already taxed)
• The TWG is proposing to expand the reach of environmental taxes

The interesting

• Tax is not the cause of housing affordability problems, but may exacerbate them.
• A reduction of GST to 13.5% would have the same cost to government as a reduction of the bottom marginal income tax rate to 5.25% or the introduction of a $7,000 tax free threshold, but result in a larger gain by high income earners
• A capital gains tax may bring in $6 billion per annum by 2031
• The TWG are doing further work on the tax treatment of seismic strengthening costs for buildings, and mention that “it does seem to be an area where tax policy is working counter to the Government’s disaster risk management agenda”

Our comment

The recommendations of the TWG were not unexpected, especially around capital gains taxes.  What has been good to see is that, by in large, the TWG seems to see New Zealand’s tax system as functioning well.  The proposed changes around KiwiSaver would be especially beneficial in growing the pool of retirement savings.

Our main concern is that the TWG is looking at adopting a complicated capital gains tax mechanism.  New Zealand tax history is littered with instances of complicated tax regimes and extending the risk-free rate of return method to include unrealised gains on assets such as business and rental investment would significantly increase compliance costs and cause tax bills to arise even where no cash income is received.

It is unfortunate that a reduction in the rate of company tax is not being considered, especially as Australia’s rate of company tax is scheduled to decrease to 25% by 2027.

The final report is scheduled for release in February.  While the government has promised that no new taxes will be in force prior to the next election, we anticipate that legislation would have been passed in time for the 2020 election campaign.

The TWG are accepting informal comment on the Interim Report.  Please contact your Baker Tilly Staples Rodway advisor if you have any questions in relation to the above or if you wish to make an informal comment to the TWG on their recommendations.