- The final report
- Key recommendations
- What’s left untouched
The Final Report
The final Tax Working Group report released late last month, marks the start of a challenging period of consultation, with a range of recommendations made for Government consideration. CA ANZ have been engaging in frequent communications with Government, the Tax Working Group, and in the media to highlight the importance of stakeholder and public consultation in this process and to ensure the technical design of any recommendations are subject to sufficient scrutiny to achieve the best possible policy outcomes.
The report is the summary of a huge amount of work by the members of the Tax Working Group, Officials and stakeholders and the public who made submissions. Our summary of the report’s recommendations is below. However, as the Minister of Revenue said in his speech to the International Fiscal Association conference last month “It’s important to note that the recommendations of the independent Tax Working Group are not binding on the Government. The Government will need to review the report thoroughly and seek advice from Treasury and Inland Revenue before making any decisions.”
Once Government have made their decision regarding the reports’ recommendations we can expect to see Discussion Documents released for consultation mid-year and in order to meet the Government’s pre-election enactment deadline, draft legislation is likely pre-Christmas 2019. Members are encouraged to stay engaged in the consultation process and any comments can be directed to the NZ Tax Team.
Capital and Wealth
Despite the large amount of media interest regarding the implications of extending capital gains taxes in New Zealand, the final report is largely in line with what was signalled in the interim report and by subsequent press releases.
While a unanimous decision was reached that capital gains tax should be extended to gains from residential rental investment properties, the Tax Working Group were unable to reach a unanimous decision on the wider reach of a CGT, with Robin Oliver, Kirk Hope and Joanne Hodge releasing a separate summary of their views. The majority view of the Tax Working Group makes a recommendation for a broad capital gains tax, subject to the following exclusions:
- The family home
- Collectibles (including art and memorabilia) and;
- Personal assets such as cars, boats and jewellery.
The group, as expected, have adopted a valuation day approach, with gains and losses to be taxed at the taxpayers marginal tax rate from the day of implementation (likely 21 April 2020) but CA ANZ were pleased to see a five-year transitional period recommended from implementation for taxpayers to seek valuations. This transitional period is in line with CA ANZ recommendations to reduce the ‘V-day’ burden on both taxpayers and the valuation industry.
The extent or availability of roll-over relief has also been extensively discussed in the tax community. The report recommends some roll-over for certain life events, such as death and relationship separation, and business reorganisation and small business reinvestment.
CA ANZ had advocated for a simplified taxation basis for small businesses, such as a turnover tax, and while we view the rejection of such a system as a lost opportunity there are a number of business-friendly recommendations included in the report.
Many members will be happy to see the possible restoration of building depreciation in some instances. While reintroducing building depreciation (even at a 1% rate) would have a substantial fiscal cost, the group feels this cost could be managed through a partial reinstatement and give the Government three options to consider:
- For seismic strengthening only
- For multi-unit residential buildings (e.g. apartment blocks)
- For industrial and commercial buildings and multi-unit residential buildings
Recommendations to simplify the FBT regime and potentially removing entertainment tax are positive steps to simplify taxation for businesses, particularly small business. It is pleasing to see black hole expenditure being revisited in the recommendations and CA ANZ will be following the progression of recommendations with interest. Black hole expenditure arises when a business is developing a new asset and along the way, the firm decides not to proceed with the project (and no asset is acquired) then the non-deductible expenditure falls into the “black hole”. The recommendations include a new rule to recognise these deductions for expenditure, claw back provisions and, a $10,000 safe harbour threshold for upfront deductions of low levels of feasibility expenditure for small businesses.
Personal income tax
“Objectives of the Government” or a variation on this theme is a frequent statement throughout the final report and this applies particularly to the recommendations regarding personal income tax which are subject not only to the Government’s target population (low income or low to mid income earners) and the final form of any capital gains tax recommendations. Despite being excluded from the scope of the terms of reference, the Tax Working Group have raised the possibility of increasing personal tax rates because is would generate greater benefits for low income earners while also reducing average tax rates for higher income individuals.
Depending on Governments objectives two recommendations are made:
- To improve the incomes of very low income households the group considers the welfare transfer system to be the best method of achieving this
- If the objective is to improve the incomes of certain groups of low to middle income earners, the group prefers increasing the lowest personal tax threshold, rather than creating a tax-free threshold, to produce the most targeted results
These recommendations will also need to be viewed in light of the Welfare Expert Advisory Group Report.
Integrity, Administration and Environment
CA ANZ are pleased to see the Working Group have recommended the establishment of a taxpayer advocate service to assist taxpayers with tax dispute resolution. When we asked members as part of our 2018 IR Satisfaction Survey for the reasons taxpayers agreed to settle disputes last year, the top two reasons were: the time commitment was too great, and, the cost of continuing was too great. We will be following the development with these recommendations closely as we see this as a real opportunity to reduce taxpayer burn-off and improve the integrity of the tax system.
The report also include recommendations for further work to be undertaken to combat the hidden economy and a to change the loss continuity rules to support the growth of innovative start up companies.
The working group have called for the Government to be clear on their objectives regarding environmental taxation, which will determine whether regulation, taxation, education, or a combination of these is the best approach. In the short term, recommendations are made regarding the emissions trading scheme and waste disposal levies.
So what was left untouched?
The scope of the final report is huge, however, a number of areas have – in our view – rightly been left untouched, particularly our GST system which is internationally recognised for its broad base an simple administration. The decision not to amend our GST system is based on the view that there are more effective ways to increase progressivity, and it is not clear whether the benefit of specific GST exemptions (such as for food and drink) would be passed on to consumers.
The group did not recommend the introduction of a financial transaction tax however international debate in this area should continue to be monitored. Recommendations against the introduction of a wealth tax, a progressive company tax and for the retention of the imputation system are also welcomed.
Minister of Revenue's Speech
The NZ Minister of Revenue told the International Fiscal Association conference the recommendations of the independent Tax Working Group are not binding on the Government.Read the full speech
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