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February 25, 2019 New Zealand’s Tax Working Group recommends Capital Gains Tax Executive summaryThe New Zealand Government created the Tax Working Group (the Group) to provide recommendations to improve the fairness, balance and structure of the New Zealand tax system over the next 10 years. (The Terms of Reference can be accessed here) On 21 February 2019, the Tax Working Group released its final recommendations on the fairness, balance and structure of the New Zealand tax system over the next 5 to 10 years. The Group’s recommendations will be reviewed by the Government and a full response is expected in April 2019. Finance Minister Grant Robertson and Revenue Minister Stuart Nash gave an initial response, emphasizing that the Government is not bound to accept all the recommendations put forward and that it is highly unlikely that all recommendations will be implemented. If some, or all of the recommendations are implemented, changes to New Zealand’s tax regime will become effective on 1 April 2021 at the earliest. The remainder of this Alert summarizes the Group’s recommendations as outlined below. A subsequent Alert will provide the Government’s response. Capital Gains Tax: The Group recommended the introduction of a comprehensive Capital Gains Tax (CGT) by an 8:3 majority. This would involve a realization-based tax that applies to capital gains on a broad range of assets, at full rates, with no allowance for inflation and limited rollover relief. Capital gains would be taxed within the existing tax system. Taxation of Businesses: The Group found that the current approach to taxation of business is largely sound but that, fiscal conditions allowing, measures should be introduced to help businesses grow, be more productive and lower what they spend complying with New Zealand’s tax rules. Environmental and ecological outcomes: The Group developed a framework for deciding when environmental taxes can be best applied. It recommended a better use of taxes to discourage activities that cause negative impacts. Further recommendations: The Group also provided recommendations on international income taxation, retirement savings, personal income tax, the future of work, charities, Good and Services Tax (GST) and financial transaction taxes, corrective taxes, housing and the integrity and administration of the New Zealand tax system. Detailed discussionCapital Gains TaxNew Zealand is unusual in not having a comprehensive CGT. A CGT, if well designed, could ensure that the tax system is fairer and more sustainable over the long-term. However, it will increase compliance costs and may affect the productivity of the economy negatively by reducing investment returns. Included assets for capital gains purposesThe Group recommended that the taxation of capital gains should extend to the following, pre-defined, assets (included assets):
Personal-use assets, such as cars, boats or other household durables would not be included assets. Income calculationThe Group recommended that capital gains should be taxed on a realization basis in most cases within the current income tax system. Therefore, capital gains would be taxed at a person’s marginal income tax rate when the asset is disposed of. There would be no discount for capital gains and no adjustment for inflation. Expenditure incurred in acquiring an asset would be deductible at the time of sale and costs incurred on improvements would be deductible from sale proceeds. A taxpayer would generally be able to offset losses arising from the disposal of capital assets against ordinarily taxable income (and not just against capital gains). However, capital losses would be ring-fenced or denied entirely for some assets. Limited rollover relief proposedRollover relief would apply in some circumstances, including but not limited to the following:
However, the rollover reliefs recommended would be significantly narrower than in most countries with a CGT. The Group recommends no general rollover relief for businesses that sell assets and reinvest the proceeds in replacement assets, although it does support a targeted measure for small businesses with an average turnover of less than NZ$5 million.1 Businesses that frequently acquire and sell assets, or that are capital intensive (e.g., private equity, venture capital, listed property trusts and primary sector ventures) in particular would be impacted. Transitional rules – Valuation DayThe Group recommended that tax should be calculated on the gains and losses that arise after implementation date (Valuation Day). Taxpayers would have five years from Valuation Day (or to the time of sale if that is earlier) to determine the value of their included assets as at Valuation Day. If the asset has not been valued, a default method would apply (such as the straight-line method). The Group favors a valuation regime that provides the taxpayer with a choice between simplicity (lower compliance costs) and accuracy. The Government and New Zealand’s revenue authority Inland Revenue would develop tools and guidance to assist taxpayers throughout the valuation process. Minority Report – Taxation of real propertyA minority of the group considered the benefits of a CGT on businesses and shares to be outweighed by the efficiency, compliance and administrative costs of such modifications. They considered that the potential double taxation and inconsistency risks will adversely impact New Zealand’s equity markets. Therefore, the minority only saw merit in broadening the currently narrow capital gains tax base to residential investment properties, and potentially to holiday homes, through extending current rules. Changes to business taxationThe Group considered that the current approach to the taxation of businesses is largely sound and did not recommend any change to the corporate tax rate in New Zealand (28%) or to move away from the current imputation system (which avoids economic double taxation by conferring a credit on the shareholder for the tax already paid by the company). The Group recommended that developments in company tax rates around the world, particularly in Australia, should be monitored. Largely depending on the implementation of a CGT, the Group also recommended a number of tax measures to enhance productivity and reduce compliance costs:
Environmental taxesThe Group noted the threat that climate change is posing to both New Zealand and the globe. It developed a framework to guide the Government’s decision-making in respect of taxing negative environmental externalities (NEE), outlining:
The Group also noted that New Zealand has limited institutional capabilities to design and implement environmental taxes and, therefore, recommended that the Government strengthen its capability to use tax to enhance environmental and ecological outcomes. OthersInternational income taxationThe Group endorsed New Zealand’s continued participation in discussions at the Organisation for Economic Co-operation and Development on the future of the international income tax framework. The Government should monitor developments in, and collaborate with, other countries. The Group recommended that if a critical mass of other countries introduces a digital services tax, New Zealand should be ready to move in the same direction, unless export industries will be materially impacted by retaliatory measures. Retirement savingsThe Group recommended that the Government considers encouraging the savings of low-income earners through measures focused on New Zealand’s KiwiSaver scheme (a voluntary work-based savings scheme). A possible measure to achieve this would be to refund the employer’s superannuation contribution tax (ESCT) for KiwiSaver members earning up to $48,000 per annum. Future of workThe Group recommended that the Government supports Inland Revenue’s efforts to increase the compliance of self-employed through measures, such as:
Integrity and administration of the tax systemThe Group noted that currently there are integrity risks associated with closely held companies as the company and top personal tax rates are not aligned. Therefore, Inland Revenue needs to strengthen the enforcement of the rules for closely held companies. The Group also recommended the introduction of further measures to fight the “hidden economy” (undeclared and cash-in-hand transactions). Tax collection could also be enhanced by increasing the remedies available to the Commissioner and establishing a single Crown debt collection agency. The Group and the private sector question whether Inland Revenue has sufficient resources to effectively administer a comprehensive CGT. In the event of a CGT as recommended, Inland Revenue would need to significantly advance its tax technical capabilities and invest heavily in new technologies to improve data analytics and overall efficiency as well as enforcement to preserve the integrity of the New Zealand tax system. CharitiesThe Group noted that the underlying issue regarding the taxation of charities is the extent to which charitable entities are accumulating surpluses rather than distributing or applying those surpluses for the benefit of their charitable activities. It recommended that the Government consider the following measures:
Illustrative packagesThe Group was instructed by the Government to produce revenue neutral packages. The Group suggested four alternative packages targeted at different outcomes; this work is at an early stage and whether such packages will be introduced depends entirely on the implementation of a CGT. The packages aim to promote fairness across the tax system. Possible revenue-reducing measures would include:
The above measures are aimed at improving the progressivity of New Zealand’s tax system and attracting businesses to New Zealand. Next stepsAlthough subject to change, a possible timeline is:
Endnote 1. Currency references in this Alert are to NZ$. For additional information with respect to this Alert, please contact the following: Ernst & Young New Zealand, Auckland
Ernst & Young New Zealand, Wellington
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