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Tax Working Group: The future is not what it used to be

October 04, 2018


Partners Barney Cumberland, Stuart Hutchinson
Senior Associates Paul Windeatt

The Tax Working Group (TWG) was established to recommend improvements to the “structure, fairness and balance of the tax system”. On 20 September the TWG published Future of tax: interim report which includes some recommendations as well as providing a heads-up on issues it is still exploring, prior to its final report in February 2019.

TWG recommendations so far

On some points the TWG has already reached a very clear, and in our view sensible, final position.

Corporate tax:

  • Do not change the imputation system.

  • Do not introduce a lower tax rate for small companies - in fact do not reduce the company tax rate at all (but keep an eye on Australia).

  • Government should consider measures to reduce compliance costs eg increase the threshold for paying provisional tax.

In its next report, look out for recommendations on black hole expenditure (linked to its work on taxing capital gains - see below), a possible relaxation of loss continuity rules for small start-ups, reinstatement of depreciation deductions for certain types of buildings and deductions for expenditure on seismic strengthening.


  • Leave well alone - NZ already has the best value-added tax system in the world.

  • No reduction in the 15% rate.

  • No GST exception for any food and drink.

  • No GST on financial services (because it is not feasible).

The TWG does question, however, whether the current GST concessions for non-profit bodies are appropriate (for more on this and other issues relevant to the charitable sector, see our companion FYI: Tax Working Group signals agenda for review of charity taxation).


  • Remove ESCT (employer superannuation contribution tax) on employer contributions to KiwiSaver for those earning up to $48,000 pa.

  • Reduce the lower rates for KiwiSaver by 5%. [It remains to be seen if the TWG will recommend an across the board reduction to the lower rates for all PIEs.]

Corrective taxes:

  • No further excise hikes on tobacco and instead prioritise other measures to help smokers quit.

  • Rationalise and simplify alcohol excise.

  • Government should decide on its goals for both sugar consumption (reduction across the board or targeting of sugar content in certain foods?) and gambling, so as to get clearer on the role of tax in shaping behaviour.

Standout Issue No 1: Capital/income and capital income

Not surprisingly, and not only for critics that view the TWG as a stalking horse for a capital gains tax, the TWG identifies the inconsistent taxation of “capital income” as one of two standout issues.

“Capital income” might seem an oxymoron to purists, but the phrase refers to a return on invested capital, including gains on the sale of capital assets. Its use by the TWG is seemingly tactical, underlining its view that not taxing some gains on the basis that they are “capital” (not income) is:

  • Not fair as the wealthy benefit (and men more than women), eroding “social capital” that sustains buy-in to the tax system by those taxed on their labour income.

  • Not consistent as some capital gains are already taxed by the income tax rules.

The TWG is also concerned that changes in business, technology and the nature of work all point to the growing importance of capital income relative to labour income.

Labour has pledged that no capital gains tax will take effect before the next election. Presumably that pledge extends to not broadening the income tax base in the current political term to include more capital gains, which is the TWG’s preferred approach.

The assets in TWG’s sights are:

  • Interests in land (but not the family home, which the Government has ruled off limits for reasons of political capital!), including all other residential land, commercial, agricultural, industrial and leasehold interests not currently taxed.

  • Intangible property.

  • All other assets held by a business or for income producing purposes that are not already taxed on sale.

  • Shares in companies, other equity interests, and certain other legal arrangements like trade ties and restraints of trade.

The Government has also ruled out inheritance tax. However, as the TWG makes clear, this does not preclude taxing any gain that has accrued on an asset (other than on a family home) up to the time of gifting or death (where the asset is disposed of by will).

The TWG discusses the possibility of deferring the taxing of the capital gain of an inherited or gifted asset, such as where the asset is bequeathed or gifted before death to a surviving spouse or other partner. Taxing the increase in value from the time of acquisition by the deceased or donor would only be deferred (“roll-over relief”) until a subsequent sale, when any further gain would also be taxed. The TWG is yet to show its hand on this issue, but we expect it will favour at most only a limited form of roll-over relief, rather than extending the relief to all testamentary dispositions and gifts.

Whatever the period of tax deferral, taxing inheritances and gifts as “capital income” is the sort of gift that opposition politicians (and maybe even New Zealand First) will likely seize on if Labour campaigns on a capital gains tax (however framed) in 2020. The solution to other more complex issues which the TWG has raised, such as the interaction of a capital gains tax with some current tax regimes (such as CFCs and PIEs) and possible anomalies (such as the potential double taxation of retained earnings sold with a company), may not be celebrated by voters (whether or not they derive labour income) who fear seeing a big chunk of their future inheritance taken in tax (never mind when). In that case, talk of “capital income” may not prove compelling.

Standout Issue No 2: Natural capital

The TWG’s other standout issue is the treatment of “natural capital”.

“Natural capital” is used by the TWG to refer to NZ’s natural environment, the TWG being tasked with examining “how the tax system can sustain and enhance New Zealand’s natural capital for positive environmental and ecological outcomes.”

The TWG notes that NZ makes relatively little use of environmental taxation, both to broaden the revenue base (such as by taxing air and water polluting activities) and to help address NZ’s environmental challenges.

Although the TWG states that taxation is not necessarily the best tool to change behaviour, it does believe there is scope for tax instruments to play a greater role (together with other tools and approaches) in delivering positive environmental and ecological outcomes in NZ.

For example, a water abstraction tax is seen as having a broader set of potential objectives than some other environmental tax opportunities. The TWG lists:

  • Rationing the total water take;

  • Improving the efficiency of water use; and

  • Taxing natural resource use.

It states that “measurement of major water takes is generally feasible, price signals can incentivise significant changes in behaviour, and … there is potential for significant long term revenue”, being criteria the TWG considers that an environmental tax should meet. It accepts, however, that Māori rights and interests, pricing localisation concerns, and equity issues would all need to be addressed before any water abstraction tax was advanced.

The TWG highlights a number of other environmental challenges (greenhouse gas emissions, water pollution, solid waste and road transport) as further opportunities for environmental taxation. As with much of the “capital income” discussion in the report, more issues are raised than solutions unveiled. Unless serious progress is made by February, this may doom the TWG’s discussion of environmental taxes to be filed in the “too hard” basket. Nevertheless, we recommend the discussion. In years to come it may prove to be the most forward-looking part of the TWG’s work.