Summary of the Tax Working Group’s Final Report

January 21, 2010 New Zealand FinanceNew Zealand Taxation

BeehiveThe Tax Working Group has released its final report on New Zealand’s taxation system, recommending numerous changes to a system it labels as incoherent, along with lacking on integrity and fairness.

After month of waiting, the New Zealand Government and people can see the results of the Tax Working Group’s analysis of the country’s taxation landscape. The results are less than flattering and thirteen primary changes have been proposed to adress the situation.

According to the Tax Working Group’s report New Zealand‘s tax system is inappropriate and relies too heavily on the very taxes that are most harming to economic growth, specifically personal and corporate income taxes. The current system also encourages business entities to ignore growth decisions in favor of lowering their tax liability. In regards to personal income tax, the current situation sees the tax burden borne by the PAYE payer, as avenues exist for the wealthy to divert their tax liabilities. The report also brings into question the sustainability of the existing taxation landscape, as with increasing international competition, rising cost of public debt servicing and changing demographics shifting an increasing tax burden placed on a decreasing portion of the population.

In order to address the ailing tax system the Tax Working Group’s report recommends a total reform of taxes, led by thirteen primary changes.

According to the report the top personal and corporate income rates, along with the trust tax rate should be aligned, to improve the overall integrity of the system. If the fiscal situation were to make this unfeasible, the minimum changes would include alignment of trust rates, personal tax rates and the top rate for Portfolio Investment Entities (PIEs).

The report also recommends that all steps be taken to keep the corporate income tax rate internationally competitive. Although the Government would be required to balance the benefits of an aligned system versus the potential increases in business from international entities. The Group has also suggested that the current imputation credit system be retained, though the need for revision might arise if the imputation system changes in Australia.

As part of the alignment strategy the current 33 and 38 percent tax rates should be reduced, and all other rates should be lowered whenever possible. The changes should be instated concurrently to a rise in the Goods and Service Tax (GST) rate from the current 12.5 percent to 15 percent. The GST system should continue to be applied with no exemptions.

The New Zealand tax base also needs to be broadened, according to the report. Biases need to be eliminated, and increases in efficiency and sustainability need to be sought, especially if top tax rate alignment is pursued. The easiest method of base broadening is to instate a Comprehensive Capital Gains Tax (CGT), though there is no unanimous decision within the Group itself regarding the potential efficiency of such a system. Investigation should also be led into identifying areas in which any forms of income are under-taxed. Further, a low-rate land tax should be instated.

Finally, the report recommends that the 20 percent depreciation loading on new plant and equipment be removed. The tax depreciation of buildings should also be removed and the safe harbor threshold be lowered to 60 percent.

New Zealand Prime Minister John Key, and Peter Dunne, Revenue Minister, have already commented on the report promising that the Government will carefully consider the results of the report.

Photo by Ewan-M