What would Tax Working Group's proposals mean for you?

Thursday, 21 February 2019

In 2017, we introduced readers to five fictional Kiwi families and explained how National and Labour's proposed families packages would affect each of them. Now, they return to examine the Tax Working Group's proposals for reform.

Hamilton solo-mum Selena Petrov heads the poorest of our families. She takes home $35,000 a year from a benefit and has three kids to take care of.

Petrov would get a tax cut.

If the Government adopted the proposal to increase the 10.5 per cent tax rate, currently applied on income up to $14,000, to its suggestion of $22,500, she would pay $595 less a year – 10.5 per cent on the first $22,500 and then 17.5 per cent on the rest.

If the other recommendation, of a rate of 10.5 per cent up to $20,000, was adopted, she'd be $420 better off a year.

If the group's third proposal, of a 10.5 per cent bracket to $30,000, was adopted, with an increase in the rate for the next tax bracket to 21 per cent, she could have a tax break of $945 a year.

KiwiSaver might seem like a better deal, too. The group wants to increase the member tax credit from 50c per $1 invested to 75c. It still only suggests the Government offer a maximum $520, but Petrov would only have to put $693 in each year to get that.

But the Tax Working Group rejected the idea of taking GST off food, or to reduce its rate. Petrov had hoped this might have helped her.

The Bennetts are a sole-income family living in Dunedin, with mother Joan bringing in $49,000 a year while Fraser looks after the kids.

Joan Bennett would also be in line for a tax cut – she would find almost half her income was being taxed at the 10.5 per cent tax rate under the working group's 10.5 per cent-to-$22,500 proposal.

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That would mean $595 extra a year.

If the 10.5 per cent-to-$30,000 option was adopted, with an increase in the rate for the next tax bracket to 21 per cent, she could have a tax break of $490 a year.

She'd also notice more in her KiwiSaver account.

At the moment, she puts in $1470 or 3 per cent of her income a year, matched by her employer. Her employer pays $257.25 in tax via the employer superannuation contribution tax. The Working Group is recommending that be refunded to those earning up to $48,000 and clawed back for those earning between $48,000 and $70,000. Bennett would get almost the full benefit of that refund into her KiwiSaver account.

She'd also pay less tax on her KiwiSaver returns – the proposal is to cut the bottom two KiwiSaver PIE tax rates by five percentage points each, from 10.5 per cent and 17.5 per cent currently.

That means if Joan were to make $1000 a year in her KiwiSaver account she would pay only 12.5 per cent of it in tax – $125 – rather than 17.5 per cent – $175.

But her KiwiSaver fund manager would also have to pay capital gains tax on an accrual basis on any capital gains on Australian and New Zealand shares in her KiwiSaver fund.

Mum and dad Jasmine and Iuta Seuseu live in Papakura with Jasmine's sister Leilani and their three kids. Iuta works as a teacher earning $64,000, while Leilani works as a casual part-time kitchen hand bringing in $14,000.

Nothing would change for Leilani – she already pays the lowest tax rate.

The biggest tax cut Iuta could get would be $595. He'd benefit from the increased member tax credit in KiwiSaver, too, but would probably pay some capital gains tax through his fund.

They plan to sell the boat they bought before they had kids because they no longer get a chance to use it. This will be exempt from any capital gains tax.

Steve and Craig Chin-Wilson both work in Nelson, bringing in $115,000 in total. Steve is a lawyer who makes $90,000 a year, currently working from a home office, while Craig works as a part time sales assistant and makes $25,000. They have one child.

Both men will probably get a tax break of $595 a year - although Craig could get $770 if the 10.5 per cent-to-$30,000 was adopted.

The bigger problem, though, is that Steve wants to buy a local law firm. It isn't doing well and he wants to build it up, attract more clients and improve its profile. If he then sells it for more than he paid so that the family can move closer to his parents in Auckland, he'll have to pay capital gains tax on that increase in value.

Even though Steve works from home, because more than 50 per cent of the property is used as their private dwelling, he can choose to treat the property as his excluded property, and keep it exempt from capital gains tax. But that means he'll have to stop claiming any costs relating to the property, such as rates and interest on the mortgage, back on his business tax bill.

His parents plan to sell their investment properties bought in the 1980s in Auckland to help the Chin-Wilsons buy a house in the bigger city. If they do this in five years' time, they'll only be charged on capital gains made since the tax was introduced – not on the gains they made in the 35 years previously.

Labour left Tax Working Group chairman Sir Michael Cullen to do the talking on tax in 2019.

Here's how the Tax Working Group's proposals would affect five Kiwi families.

Michael and Abigail Saxon-Mahuta have two kids. Abigail works as a public servant making $120,000, while Michael is a part-time office assistant making $30,000. Michael has an older farmer brother who has no kids and plans to leave him his property when he dies.

They would probably each get a tax cut of up to $595 - although Michael could get $1120 if the 10.5 per cent-to-$30,000 option was adopted.

They've been talking about buying a rental property and this might put them off. They'd hoped to build up some capital gains as a nest egg for retirement. But once the policy is introduced, any capital gains will be taxed. If they went ahead anyway and eventually sold, it would make sense for them to assign the gain to Michael, if they could, because his income tax rate is lower and it would mean a lesser bill.

Michael's brother could still leave them his farm, tax-free. (But if they wanted to sell it, the farm would attract capital gains tax.) Abigail owns a portfolio of shares that her parents bought for her when she left school. If she were to sell them, she would pay a tax on any gains in value made after the policy was introduced.