The Future of Tax in New Zealand
In recent times the Tax Working Group reviewing New Zealand's tax system has received increased attention.
This is no surprise as it gets closer to making its recommendations, which now appear likely to come out early in the New Year. The Tax Working Group is a collection of academic, government and industry tax professionals charged with reviewing New Zealand's tax system.
Part of their brief is to look at the equity and fairness of the system and look for ways to broaden the tax base, ideally so as to fund drops in the personal, trust and corporate tax rates.
Many readers will be aware of some of the options they are considering in respect of the taxation of property, including capital gains tax, a land tax and a tax focused on property investments (which imposes a deemed income based on a risk free rate of return). My thoughts on this process are as follows:
I believe the upshot of changes will be:
- I expect to see individual marginal tax rates dropped, corporate and trust rates aligned, and the GST rate increased to pay for reduction in other rates.
- While changing tax rates is high impact, don't expect any radical changes to the taxation laws in the near future, e.g. full-blown capital gains taxes, or equity taxes, etc. The government has already gone out of its way to deny that it is interested in some of the proposals, particularly a capital gains tax. Further, Bill English's latest comments indicate there will be no radical changes in the 2010 budget announcement;
- Furthermore the process involved in producing legislation to deal with the implementation of any relatively complicated new rules, such as the possible risk free rate of return tax on property investments, means that it would be some time before this comes into effect even if it were part of a budget announcement. So don't expect rapid new changes to rules, but expect lots of options to be debated in an ongoing public review throughout 2010.
- I expect the Tax Working Group to make a number of different proposals rather than give the government one preferred option. This would allow the government to cherry-pick elements of it that they wish to push further.
- I do expect some changes to the tax system to be announced in the 2010 budget. Property investment seems to be the obvious target at the moment and a change such as denying depreciation deductions on buildings would not surprise, though whether it would be retrospective is an interesting question.
- I think the government will be led by the results of a similar review that is currently being undertaken in Australia. Look to the Henry review in Australia as an influencing factor on what is going to happen in New Zealand.
To pay for these changes:
- Major reform will be signalled, but deferred pending further review by select committee and public reports.
- Major changes to the way existing tax rules are used to fill the public purse will occur, and these changes are likely to include:
- Matching of the top marginal rates to the trust and corporate rates - the so called 30-30-30 option, with the top marginal rates and trust and company rates set to the same peak rate, and a focus emerging on alignment to Australia.
- In the medium term, a reduction of the corporate (and matching marginal rates and trust rates) to match the Australian rates, currently 27% but likely to fall to 25%.
- An increase in GST to 15% or thereabouts - easy to roll out and administer so very likely.
- 'Rifle taxes' focused on property, including looking at taxing capital gains through the front or back door (e.g. taxing rental and commercial property gains, greater enforcement of existing rules and speculators cloaked as investors being attacked more).
- A focus on reduced public spending in all sectors, typical of any National Government, where the leaders come from a 'spendthrift' small and large business mindset, trained in seeking economies and cost reduction, the very opposite of the Labour mob.
I think that stamp duty should be considered. It is progressive in nature (taxes volume) so satisfies the fairness and equity requirement. It is also a system that is relatively easy to legislate for, hard to avoid, and easy to enforce.
If targeting the property sector and reducing the risks of a speculative bubble are goals, then stamp duty on land transactions would also seem to achieve these goals. It dampens speculation (taking the margin off traders, leaving only the long-term investors to prevail).
In the meantime, we wait with bated breath as to what the next move is. Naturally GRA will keep you abreast of developments.
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