Confirming the Tax Working Group’s analysis of the New Zealand tax system, Bill English delivered a speech on March 23rd calling the taxes burden faced by an average working family “unfair and inequitable.” According to the Minister the root of the problem resides in the current definition of income and the proliferation of differing tax rates, which become apparent when individuals or families with relatively similar incomes have significantly dissimilar tax obligations.

Bill English illustrated an example of taxation inequality by drawing attention to a hypothetical self-employed individual who would typically pay over NZD 27 500 annually in tax. He contrasted this with the situation whereby the self-employed person forms a company which is owned by a separate entity and assigns themselves a salary of NZD 48 000, automatically reducing their tax liability by NZD 3000. The reduced income would then entitle them to a Working for Families benefit, which allows them NZD 8 500 entitlement. Further tax obligation reductions could be achieved by claiming losses from a leveraged property investment. According to Bill English, it is conceivable for an income of NZD 100 000 to face NZD 10 000 in taxes, while a typical earner would exceed NZD 27 500.

Explaining the Government’s dedication to ratifying the misbalance, the Finance Minister said: “In the Budget, the Government will make the tax system fairer by closing this type of loophole. We will make sure that taxable income more accurately reflects true economic income – and that the system is fairer to all taxpayers.”

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With the countries recent focus on the tax system and possible reforms, John Key initiated his speech by disclosing the Government’s plans for the taxation landscape. He indicated that investigations are currently being held around the feasibility of implementing a raised Goods and Service Tax (GST) rate of up to 15 percent, from the current 12.5 percent. It was revealed that there could be a lowering at all levels of personal tax rates, with particular emphasis on top-earners. The Tax Working Group recommended risk-free return rate method for property investment, land taxes, and capital gains tax have all been rejected by the Government. There is a possibility that Working for Families and superannuation will see a rise in payments, pending decision on the GST rate. The complete tax package, which John Key described as significant, will be detailed in May, alongside the national budget announcement.

Within his speech, John Key revealed the Government’s revised view on education, promising a ‘shake up” for the tertiary system, and a shift in emphasis in secondary schools towards trade and practical skills. He also promised to increase support for early-childhood education. Changes to resource laws were announced that will see mining on conservation land, with funds from mining licenses funneled back into conservation care. Higher degrees of training and regulation were also promised for Sickness and Domestic Purposes Beneficiaries.

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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.

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At his first press conference for 2010 John Key summarized the Government’s goals for the new year, and said that “Shoring up the tax base and ultimately lowering personal tax rates are important”. Though he provide no further details, John Key said that further explanations on the Government’s economic position will be provided on February 9th, at the opening of Parliament.

Ultimately, no further decision on personal taxation can be expected before discussion on the findings of the Tax Working Group, a government sponsored collective charged with investigating the country’s taxation future. According to the Prime Minister, the group’s final report can be expected within weeks. He went on to say that it was obvious from preliminary releases that the Tax Working Group had identified numerous shortcomings within New Zealand’s taxation landscape, and would address them in its final report.

John Key also said that he would remain “vigilant” on the issue of corporate income tax. Continuing to explain New Zealand’s fiscal situation, the Prime Minister said “…it is my expectation that the major theme for 2010, for the Government, will be improving New Zealand’s economic growth. The Government remains very committed to strengthening our economy and lifting wages, we will also remain very focused on ensuring that we deliver value for money from the state sector.”

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Amid a global financial crisis and worldwide climate of tax changes, the New Zealand Government has created two research groups with the common goal of improving the country’s financial standing. The 2025 Taskforce was charged with forming a framework proposal to close the income gap between Australia and New Zealand. It’s report was released on November 30th.

The Tax Working Group was instate to address New Zealand’s key medium-term taxation challenges. As a precursor to its final report, the group held a conference on December 1st, to discussing. The final report submission is expected in early 2010. Both groups have advised the Government to enact radical and sweeping changes to New Zealand’s tax system.

The 2025 Taskforce’s framework for economic reform includes lowering top-end personal and corporate taxation to between 20% and 25% and not instating a capital gains tax. It extends to abolishing certain universal benefits, Kiwisaver subsidies and the New Zealand Superannuation fund, along with selling state assets like TVNZ, Genesis Energy, Mighty River Power and Meridian Energy. The ideas were refused by John Key, New Zealand Prime Minister, the day before the reports release. Bill English, New Zealand Finance Minister, stated on the day following the report that there will be no “big bang” changes to the next New Zealand Budget.

Although the Tax Working Group has not officially stated their recommendations to the New Zealand Government, comments to the media and released summary papers give an indication of think tank’s intentions. Bob Buckle, Chairman of the Tax Working group, recently provided a summary, saying “We’ve looked at capital gains tax, we’ve looked at more targeted schemes for dealing with investment in property. We have looked at the pros and cons of lifting the GST rate and at some of the ways in which we treat depreciation on buildings”, in the same interview he revealed that the group had investigated land taxes too”.

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According to a Green Party press release published on the 21st of October, Dr Russel Norman, Green party co-leader, has said that the government instituted Tax Working Group is “hopelessly compromised” and not an accurate representation of New Zealand society as a whole.

Dr Russel Norma’s objection centers primarily around the panel’s inclusion of John Shewan, a former Westpac Bank advisor. According to Dr Norman “The recent outcome of the High Court case in Auckland involving Westpac shows that members of the group set up to reform the NZ tax system have been actively involved in promoting tax avoidance to assist overseas-owned banks”.

According to the press release, the composition of the Tax Working Group is skewed too heavily in the direction of “those working for corporate interests,” and is in “no way representative of New Zealand society”. He went onto say “I have very real concerns that the Government will be getting a report back from this group later this year that favours the sectors many on this group represent rather than the vast majority of tax paying New Zealanders.”

The Government commissioned Tax Working Group has raised another idea to aid the New Zealand Government’s coffers, a land tax. As it is envisioned and researched by the Tax Working Group at the moment, the land tax will be levied at 0.1% of the unimproved value of land without considering the worth of the buildings on it.

Average households will see a total tax liability of $214 annually, which will raise an additional $460 million for the New Zealand government. Estimates by the Dominion post have claimed that this is enough to lower the top marginal personal tax rate to 33%

According to Bill English, New Zealand Finance Minister, the idea of a land tax is “floating around as an issue”. He did not go further to say how likely the idea is. It has been repeatedly stated by Government figures that there is an aim of reducing personal, corporate and trusts tax levels to 30%. Other possible ideas put forward by the Tax Working Group, like raised GST levels, all aim to make this a reality.

Craig Elliffe, Auckland University tax policy and law professor, has brought forward the proposal that Government should implement a capital gains tax system. This comes as a counter-action to the proposal from the government established taxation working group which has recently endorsed the raising of Goods and Service Tax (GST) from 12.5% to 15%.

Craig Elliffe criticized the nature of GST, under which those on a lower income would proportionally be spending more on GST than those on higher incomes. The proposal of raising GST is thought to be able to raise an extra NZ$2 billion in revenue, which could then be used to cut personal taxes. Craig Elliffe stated that the equivalent VAT tax in the United Kingdon, and its lowering in December saw a retail turn over increase of £2.1 billion increase, and that if compared to the US a capital gains tax will see NZ$1.36 billion in tax revenues.

While the Government has stated negative opinions of Capital Gains Tax, Peter Conway, Council of Trade Unions secretary, has stated that “despite the government apparently ruling it out, there is probably a better chance for such a tax than ever before”.

It was announced by Finance Minister Bill English and Revenue Minister Peter Dunne that the “Tax Working Group” has been established and will assist the Government with policy decision changes. While the newly formed group will not have direct input into the decision making process for the Government, it will still be influential in its actions. Primarily the group will conduct a number of meetings in the time space between June and November, along with publishing a number of papers which will directly address issues faced by the Government. The product of the meetings and conclusions of the meetings will be used as references for any decisions made.

Statements made by Bill English and Peter Dunne indicate that the Tax Working Group’s primary concern will center in the medium-term decisions facing the Government. Ideally the group is aimed at providing unbiased pros and cons research into key issues. The group is headed by Victoria University’s Centre for Accounting, Governance and Taxation Research and is comprised of academics, private sector figures, along with representatives from both the Treasury and Inland Revenue.