Concerns about the structure, fairness and balance of the tax system have led to the Tax Working Group recommending the Government tax more income from capital gains.
Group Chair Sir Michael Cullen says our system has many strengths but there is a clear weakness caused by our inconsistent treatment of capital gains.
“New Zealanders earning just salary and wages are taxed on their full income but we have several situations where you can earn income from gains on assets and not be taxed at all.
“All members of the Group agree that more income from capital gains should be taxed from the sale of residential rental properties. The majority of us on the Group, by a margin of 8-3, support going further and broadening that approach to include all land and buildings, business assets, intangible property and shares.
“We have judged that the increase in compliance and efficiency costs is worth it if we can reduce the biases towards certain types of investments and improve the fairness, integrity and fiscal sustainability of the tax system.”
The Group recommends that a tax on capital gains would kick in when an asset is sold or changes hands and would be applied with no discounted tax rate and no allowance for inflation. Gains would be calculated from when any new law comes into force.
Three members prefer for this to apply only to residential rental property.
Sir Michael says the Group has presented the Government with choices and options rather than a rigid blueprint.
“The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains. It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time. It may decide to apply the deemed return method to property. All these options are open to the Government.”
The Tax Working Group estimates that broadly taxing more income from capital gains will raise roughly $8 billion over the first five years.
“If the Government chooses to proceed down this path, it then unlocks opportunities to reduce taxes in other areas so we have given them some options to consider,” says Sir Michael.
Lowering personal income tax
The Group has investigated a range of reductions in personal income tax. Its preferred approach is allowing New Zealanders to earn more at the lowest tax rate of 10.5%. This would reduce income inequality, benefit all full-time workers, and support those transitioning into work.
The Group has identified a range of measures to encourage saving, targeting those at lower- and middle-income levels. These include refunding the Employer Superannuation Contribution Tax (ESCT) for KiwiSaver members earning less than $48,000 a year and cutting the KiwiSaver tax rates for low- and middle-income savers.
These reductions would mean that this group would pay less tax overall on their KiwiSaver, even if the income from capital gains on their accounts is taxed.
The Group sees the current approach to the taxation of business as largely sound and sees no case to reduce the tax rate or introduce a progressive scale for companies. However, it is recommending measures to help businesses to grow, be more productive and lower what they spend complying with our tax rules.
“Deliberations over extending the taxation of capital gains have taken up a considerable amount of time but our final report is about far more than that single issue,” says Sir Michael.
“The report has a strong focus on the environment and recommends better use of taxes to discourage activities that cause negative impacts. We have developed a framework for deciding when such taxes can be best applied.
“Transitioning to a more sustainable economy is a long-term project but we are recommending to Government that increasing the rate and scope of the Waste Disposal Levy; strengthening the Emissions Trading Scheme; and using congestion charging on our roads should be immediate priorities.”
Enhancing the integrity and administration of the tax system
The Group has recommended a number of measures to safeguard the integrity of the tax system and improve its administration, which it thinks should be implemented regardless of whether a tax on more income from capital gains goes ahead.
- Increased enforcement of closely-held companies as there appears to be a set of integrity issues around their tax affairs.
- Inland Revenue’s crackdown on the hidden economy could be strengthened with the introduction of stricter reporting requirements.
- A single Government debt collection agency should be established to achieve economies of scale and fairer outcomes for New Zealanders who owe money to the Government.
- A taxpayer advocacy service should be established to help small taxpayers in dispute with Inland Revenue.
- Regular reviews should be conducted of the charitable sector to ensure the tax concessions enjoyed by the businesses they run are being put towards the intended social outcomes.
“The Final Report represents the end of our work on the Tax Working Group but the national conversation we’ve all been having about tax will continue,” says Sir Michael.
“We encourage all New Zealanders to stay involved as the programme of tax reform is developed. Together, we can – and should – shape the future of tax.”
Read the Final Report with supporting videos and factsheets at www.taxworkinggroup.govt.nz/resources/future-tax-final-report