Ministers issue fresh request to Tax Working Group to 'consider inequality'

Thursday, 20 September 2018

The Tax Working Group releases its interim report.

The Government has given the Tax Working Group a prod along after it stopped short of reaching a recommendation on the merits of a broad-based capital gains tax in its interim report.

The Tax Working Group (TWG) was established to advise the Government on possible sweeping reforms of the tax system.

It set out two models for what a broad-based tax on capital gains could look like in its interim report published on Thursday.

Chairman Sir Michael Cullen said 'the key issue' it had looked at was tax on capital income, but said it was not a 'no brainer'.

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Tax Working Group chairman Sir Michael Cullen (centre) will now have the job of steering the working group towards its final recommendation.

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Cullen confirmed the TWG had stopped short of making a recommendation ahead of its final report which is due in February.

Finance Minister Grant Robertson and Revenue Minister Stuart Nash immediately released a letter they had sent to the TWG.

The letter asked the TWG to 'consider a package or packages of measures which reduces inequality, so that New Zealand better reflects the OECD average whilst increasing both fairness across the tax system and housing affordability'.

The ministers also asked the TWG to examine which of two models for taxing capital gains that the TWG considered 'would be best to ensure the tax system was … fair and balanced'.

A source close to the TWG said the letter sent 'a strong signal' about the Government's desire for a broader capital gains tax.

Cullen said there were 'advantages and disadvantages' of extending the taxation of capital income.

'There is practically nothing in tax that is a no brainer.'

Cullen has warned the TWG might be unable to reach a unanimous view, even when it publishes its final report in February, and said it was possible it might not come to 'any conclusion at all' while emphasising he thought that was unlikely.

As expected the TWG has recommended against changes to GST or offering small businesses a discounted rate of company tax.

Environmental taxes such as taxes on petrol and diesel were the 'second major issue' the TWG had considered, Cullen said, but the TWG had only looked at the issues in principle.

'We rate rather low in the use of environmental taxes – they are not popular of course,' Cullen said.

Former Labour finance minister David Cunliffe proposed a board-based capital gains tax in 2011 and the debate is showing no sign of going away just yet.

'Short-term opportunities' included expanding the Waste Disposal Levy, strengthening the Emissions Trading Scheme, and advancing the use of congestion charging, the TWG said.

The advantages of the broader taxation of capital gains were 'fairness, equity' and that people with the same income would pay the same amount of tax, Cullen said.

'In New Zealand a very high level of capital assets are held by the top 10 or 20 per cent of the population and that is the main reason why our tax system is less 'redistributive' than most developed economies.

'On the other hand, as everybody points out, capital income taxation is complicated, and the more you go into the details the more complicated it gets,' he said.

Tax Working Group members (from left): Geof Nightingale, Robin Oliver, Craig Elliffe, Marjan van den Belt, Sir Michael Cullen, Nick Malarao, Joanne Hodge, Bill Rosenberg, with fellow members Kirk Hope, Hinerangi Raumati-Tu'ua and Michelle Reddington not pictured.

'But if other developed economies can do it, why can't we?' he added.

Cullen acknowledged there was a concern more taxes on capital gains could discourage savings and increase rents, though he denied the latter was clear.

'The weight of evidence is not supportive of the 'scare tactics' about rents increasing significantly.'

The TWG's view was that if the Government was to widen the taxation of capital gains, it should do so by extending income tax to more forms of capital gains – rather than introducing a new tax as such, he said.

Tax could apply either when people sold assets such as investment properties or shares, or a second option was that people could be required to pay tax annually on the value of money they had invested – in a similar way to how some investments in foreign shares were currently taxed.

In either case, tax would only apply to any capital gain that accrued after the tax came in, Cullen said.

It was 'hard enough politically to get anything like this over the line' and retrospectively collecting capital gains tax on past activities would be 'sure and certain death' for anyone who tried, he said.

Cullen has said he wouldn't want to posit what the TWG's final word would be 'at the present time', or what the response might be from political parties.

Robertson said the Government had 'always been clear that no changes will be implemented this term and that there are key bottom lines'.

'In particular the family home, increases to income tax and GST, and an inheritance tax are off limits,' he said.