Date posted: 7/10/2020

We now need to be smart about how taxpayers' money is spent

Simplicity, certainty and low compliance costs are needed from New Zealand’s tax system more than ever, says NZ Tax Leader John Cuthbertson FCA in his look at what the next Government will inherit tax wise.

In Brief

  • Simplicity, certainty and low compliance costs are key to recovery
  • Warning not to burn the new shoots of recovery
  • Support for tax measures that favour investment and equity injections in growing businesses.

If you were to look at our recent submissions to Government or Inland Revenue, you’d see our three key tax principles highlighted in each, simplicity, certainty and low compliance cost.

The next Government is set to inherit the biggest challenge of our generation including high national debt, and uncertainty for businesses and Government alike.  Simplicity, certainty and low compliance costs are needed from our tax system more than ever to drive productive investment and infrastructure growth.  

The current Government has implemented several tax compliance measures, such as the increased low value asset write off threshold, that if continued or extended, could provide real benefits for taxpayers.

New Zealand’s current approach to the COVID-19 has supported many Kiwi’s, but ultimately is not sustainable. While Governments like to have ambitious goals early in their term, a steady hand is needed, and we caution against burning the new shoots of recovery by seeking to increase taxes too soon. 

CA ANZ does not support the sudden removal of short-term policy measures as this could create spikes in tax liabilities for businesses. However eventual revenue raising will be necessary and future focused investment will be key. 

While New Zealand and other countries face such high levels of uncertainty, policy agility is important but future measures should be targeted. The OECD in their latest review of COVID tax responses aligns with these ideas. New policy measures or changes must also cohesively integrate within our wider tax system.  

Only once the recovery phase is truly imbedded does the OECD recommend Governments look to refresh our approaches to the economy and tax system.  

New Zealand is in the fortunate position that our tax system is mostly cohesive and is sustainable in the short to medium term, coupled with the fact we entered the COVID-19 pandemic with a national debt level more manageable than other countries.  

The path ahead

So, when it comes to refilling our revenue stores, what do we need to do?  

  • Taxes need to be simple for businesses to understand and have a low compliance burden
  • Supporting businesses means ensuring there aren’t (or as few as possible) impediments to doing business 
  • Consider how we can utilise the tax system to support growth. Do new tax measures or current tax settings support innovation, infrastructure and investment?
  • Ensure any tax changes or new tax measures are compatible with our existing tax system
  • Be firm on what’s enforceable but not currently complied with (capture tax due from the hidden economy)

There’s a need to be smart now about how taxpayer’s money is spent. In the early days of the COVID response it was imperative that relief was made available quickly, sometimes at the cost of strong policy foundations.

The challenge for the next government and Inland Revenue will be to balance the appropriate speed of policy implementation with considered policy targeting.  

Tax measures that will have real benefit for business and the economy are rarely fiscally neutral, we encourage those that favour investment and equity injections in growing businesses.

Relaxing the current loss continuity rules, with the introduction of a secondary business continuity measure will greatly assist with injection of new equity without extinguishing available tax losses. This measure is intended to apply from the current income year and its introduction should be expedited. 

Equally, changes to our feasibility expenditure rules are currently sitting in a tax Bill awaiting its second reading in parliament. CA ANZ believes these feasibility proposals should go further. With the right settings and enhanced certainty these changes could incentivise businesses to grow and explore new products and markets.  

Although implemented as an initial COVID-19 response, the reintroduction of building depreciation for commercial buildings is a good example of a tax measure that ticks the three ‘i’s’ – innovation, infrastructure and investment. As well as improving taxpayers cashflow (by reducing tax obligations), reintroducing building depreciation adds to the sustainability of the business and surrounding community by encouraging further business improvements and earthquake strengthening and adds a substantial ‘pro’ for those looking to develop or purchase new property to expand their business or conduct R&D.  

New Zealand could look to improve and encourage investor activity in infrastructure projects. If a tax measure doesn’t encourage investment, at a minimum it shouldn’t discourage it. A big question for any government is how can we achieve the more significant infrastructure projects needed in New Zealand? There are differing tax challenges at the various stages of development. Providing specialists contractors and investors with certainty of tax implications and outcomes may make our projects more attractive. New Zealand is a small market and we need to be internationally competitive.

For example, large projects requiring foreign skilled workers or expertise, a project running over time can create significant tax issues, such as the possibility of backdated PAYE. A pragmatic approach to cross-border workers when circumstances change could also make New Zealand more appealing internationally. 

Feasibility expenditure submission

The Taxation (Annual Rates 2020-21, Feasibility Expenditure, and Remedial Matters) Bill is currently suspended in Parliament due to the election. The Bill covers a wide range of issues, including purchase price allocation, feasibility expenditure, habitual buying and selling of land and GST on outbound mobile roaming services.

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