The report of the Tax Working Group (TWG), led by Victoria University, which has been studying the options for improving New Zealand’s tax system, will be carefully considered by the government, Finance Minister Bill English and Revenue Minister Peter Dunne have said.
The TWG identifies critical concerns with the present tax system in New Zealand. It classifies its structure as inappropriate as it relies heavily on the taxes most harmful to growth, particularly corporate and personal taxes, with a major hole concerning the taxation of capital. Many people also face a disincentive to work because the abatement of Working for Families tax credits creates very high effective marginal tax rates.
It also feels that the tax system lacks coherence, integrity and fairness, with significant risks to future compliance. Differences in tax rates and the treatment of entities provide opportunities to divert income and reduce tax liability. This means investment decisions can be about minimizing tax rather than the best business investment. For individuals, the tax burden is disproportionately borne by PAYE taxpayers since many with wealth can restructure their affairs through trusts and companies.
The TWG therefore believes that the structure of the tax system needs to be significantly improved by making a combination of changes to the tax base and tax mix, to tax rates, and by improving some of the supporting tax rules.
Its major recommendation is that the company, top personal and trust tax rates should be aligned as far as possible to improve the system’s integrity. If at any time this is no longer feasible due, for example, to global pressure causing the company rate to reduce, at the very least the trustee rate, top personal tax rate and top rate for widely-held savings vehicles need to be aligned.
However, tax rate alignment at, say, 30% would still leave New Zealand’s company tax rate uncompetitive with other countries’ tax rates, particularly that in Australia, while the top personal tax rates of 38% and 33% should be reduced to better position the tax system for growth. It suggests that the latter could be achieved as part of a package to compensate for an increase in goods and services tax (GST).
The TWG puts broadening New Zealand’s tax base as another priority so as to address some of the existing biases in the tax system and to improve its efficiency and sustainability. Base-broadening will be required in any case if there are to be reductions in corporate and personal tax rates while maintaining tax revenue levels.
It had considered the introduction of a comprehensive capital gains tax (CGT) as an option for base-broadening. However, most members of the TWG have had significant concerns over a comprehensive CGT, and have preferred the approach of identifying gaps in the current system.
The majority of the TWG therefore support detailed consideration of taxing returns from capital invested in residential rental properties and the introduction of a low-rate land tax, as a means of funding other tax rate reductions.
With regard to other targeted options for base-broadening, it would also approve removing the 20% depreciation loading on new plant and equipment; removing tax depreciation on buildings, if empirical evidence shows that they do not depreciate in value; and changing the thin capitalization rules by lowering the safe harbor threshold to 60% or by reviewing the base for calculating this measure.
The TWG believes that GST should continue to be applied broadly, with no exemptions. However, it also recommends raising its rate to 15%, from the present 12.5%. Such an increase, it says, would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment. However, any increase in the GST rate would need to be accompanied by compensation to those on lower incomes. This, it says, would significantly reduce the net revenue raised from a higher GST.
"The government's focus in 2010 is increasing New Zealand's economic growth and productivity," Bill English said. "There is no doubt that good tax policy can play a role in that.” He added that "we also want a tax system that helps move us away from our recent preoccupation with borrowing and consumption – at the same time recognizing that any changes must be broadly fiscally neutral given that we face several years of budget deficits.”
The ministers said that the TWG report – one of several reviews to have reported back to the government in recent months – will be considered in the coming months as part of Budget decision making.
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