The Tax Working Group is updating the public on its progress and thinking with the publication of its Interim Report today.
Chair Sir Michael Cullen says that the Group has conducted a wide-ranging review in order to assess the structure, fairness, and balance of the tax system. The Group has also brought a broad conception of wellbeing and living standards to its work – including a consideration of Te Ao Māori concepts and perspectives on the tax system.
Thousands of New Zealanders – including iwi, businesses, and unions – have engaged with the Group over the past months. “The thousands of public submissions have given us a clear indication of the key challenges and opportunities for the tax system,” says Sir Michael.
“We see clear opportunities to improve the balance of the system by introducing environmental taxes, while measures to increase tax compliance would increase the fairness of the system. We have also identified important issues regarding the treatment of capital income in the tax system.”
The highlights of the interim report include:
- The taxation of capital income. The Group's work on capital income is not yet complete. The Interim Report sets out two potential options for extending capital income taxation: extending the tax net to include gains on assets that are not already taxed; and taxing deemed returns from certain assets (known as the risk-free rate of return method of taxation). Feedback on these options will inform the recommendations in the Group's Final Report in February 2019. The Group is not recommending the introduction of wealth taxes or land taxes.
- Environmental and ecological outcomes. The Group sees significant scope for the tax system to sustain and enhance New Zealand's natural capital. Short-term opportunities include expanding the Waste Disposal Levy, strengthening the Emissions Trading Scheme, and advancing the use of congestion charging.
- Housing affordability. The Group has found that the tax system is not the primary cause of unaffordable housing in New Zealand, but is likely to have exacerbated the house price cycle. The Group's forthcoming work will include consideration of the housing market impacts of the options for extending capital income taxation.
- GST. The Group is not recommending a reduction in GST, or the introduction of new GST exceptions. Instead, the Group believes that other measures (such as transfers) will be more effective in supporting those on low incomes.
- Business taxation. The Group is not recommending a reduction in the company rate or the introduction of a progressive company tax. The Group is still forming its views on the best ways to reduce compliance costs and enhance productivity.
- The administration of the tax system. The Group has identified a number of opportunities to improve tax collection such as increasing penalties for non-compliance as well as recommending a single Crown debt collection agency to ensure all debtors are treated equally. A taxpayer advocate service is also recommended to assist small businesses in disputes with Inland Revenue.
Sir Michael says that extending the taxation of capital income will have a range of advantages and disadvantages. The Group is still weighing up these issues, and will come back with firm recommendations in its Final Report in February 2019.
“Extending the taxation of capital income will have many benefits,” says Sir Michael. “It will improve the fairness and integrity of the tax system; it will improve the sustainability of the revenue base; and it will level the playing field between different types of investments. Yet the options for extending capital income taxation can be complex, resulting in higher compliance and administration costs.
“We have made some good progress in setting out the main choices and options – but there is still a great deal of work to do before we provide our Final Report in February.”
The Group's Final Report will provide full recommendations on all of the issues examined by the Group, including the rates and thresholds for income tax.
“The Group will be mindful of the distributional impacts of any changes it recommends in its final report. It also recognises that some people may need time to transition to the new arrangements.
“It's also worth pointing out that any extension of capital income taxation would apply from a future date, and would not have a retrospective element.
“Everyone on the Group believes we have a unique opportunity to improve the tax system. We are all determined to deliver recommendations in February that will make a positive difference for New Zealanders,” says Sir Michael.
Read the Interim Report at www.taxworkinggroup.govt.nz/resources/future-tax-interim-report