Without capital gains tax ‘things will just get harder’, warns accounting body

Saturday, 29 June 2024

Finance Minister Nicola Willis says she realise the tax cuts are 'modest' but hopes New Zealanders will notice a difference.

Persuading the coalition Government to bite the bullet on tax reform by introducing a comprehensive capital gains tax might seem the very definition of a lost cause.

But that is not stopping John Cuthbertson, the tax leader of accounting body Chartered Accountants Australia and New Zealand (Caanz), from giving it a go.

Five years’ after NZ First scuppered a recommendation from Sir Michael Cullen’s Tax Working Group to introduce a capital gains tax, Cuthbertson is arguing the need to broaden the tax base is only going to grow.

And better an easy-to-administer “capital gains tax light” overseen by a National-led government than a more left-of-field solution from a Labour-Green one down the track, he argues.

“We think it’s time to look at tax reform, absolutely.”

Cuthbertson admits to being rattled by how close the former government came to springing a plan for an annual wealth tax on a largely unsuspecting public.

Last year, Labour was just weeks away from announcing a 1.5% annual wealth tax on about 46,000 individuals with a net worth of more than $5 million, before prime minister at the time, Chris Hipkins, decided to pull the plug.

Chartered Accountants Australia New Zealand tax leader John Cuthbertson is intent on keeping the torch for tax reform alive.

Labour’s finance spokesperson, Barbara Edmonds, has since sent strong signals it may now pursue more orthodox options, based on the principle of equally taxing income no matter what the source.

Ireland’s capital acquisition tax, which is a 33% tax on any gifts or inheritances people receive over the course of their lives, usually with a €335,000 (NZ$588,000) tax-free threshold applying, is also understood to have caught the party’s attention.

Cuthbertson says what concerned Caanz most about last year’s proposal was “the speed with which a wealth tax was bought up”.

“The legislation was drafted and ready to go. It was wake-up call that it was only a ‘captain's call’ by the prime minister that meant we didn't get it.”

Any substantive changes to the tax system need to be researched and thought through and experience in other countries considered, he says.

Hence, Caanz’ push for the Government to get the ball rolling now, in the “quiet period of the election cycle”, ideally with a bi-partisan discussion on the options.

Caanz put a poll on tax reform to its members at a conference in Christchurch two years’ ago and 85% favoured a capital gains tax over the then-status quo, he says.

“And that’s from a group of tax accountants.”

Any broad capital gains tax would appear an anathema to the Government, Cuthbertson acknowledges.

But both long-term trends and medium-term fiscal pressures should be prodding the Government to yield, he believes.

The more immediate pressure for tax reform is that the Government is stuck between a rock and a hard place addressing the country’s “infrastructure deficit” while also trying to bring its books back into balance, he says.

Debt-serving costs have risen to become the fourth-largest cost facing the Government, costing $8.5 billion a year, he says.

“That's not going to get smaller any time soon because we're still borrowing, and those costs become a millstone around your neck.”

Taking over from Grant Robertson, new Labour finance chief Barbara Edmonds says she aims to hold government's budget promises to account.

The Budget saw the Treasury push out its projected return to surplus to the year ending to June 2029 and flag a need for $12b of extra borrowing over the next four years while pencilling in small annual increases in operating allowances of $2.4b.

The latter may already be eaten into by the Government’s commitment to increase Pharmac’s funding by $600m a year to fund additional cancer treatments and other medications.

Cuthbertson believes the fiscal outlook should be enough to drive home the need for tax reform.

In the longer term, the problem with continuing to rely on taxes on wages to do more of the heavy lifting is that the Government already raises about 52% of tax through wages, but the population is ageing and the way the work is done is changing, he says.

The Government is currently bringing forward legislation that would make it easier for businesses to engage people as independent contractors, without the risk they could argue down the track that they are actually employees.

An appetite to address “fiscal drag” as annual wage rises push people into higher tax brackets has been watered down into a one-off bracket adjustment in the May Budget.

Caanz isn’t the only organisation keeping the record on tax reform on autoplay.

In May, the OECD joined the International Monetary Fund (IMF) in reiterating its call for the Government to broaden the tax base by looking again at the taxation of capital gains.

But there is no outward sign any of their arguments are making any impression on the Government.

Finance Minister Nicola Willis told The Post on Wednesday the Government didn't have a revenue problem, it had a spending problem.

“Our Government's focus is on ensuring better value for money for the spending that we do,” she said.

“We will want to continue to take measures that enhance the fairness and integrity of the tax system, but do so in a way that doesn't lead to New Zealanders being taxed too much or scaring off investors who are sorely needed for the growth of the economy.”

Cuthbertson is matter-of-fact about what he thinks a lack of action would mean for the nation’s outlook.

Without reform, things will “just get harder”, he says.

“Everything seems to cost more and that's not going to go away. Yes, you can drive efficiencies out of everything. But we need new hospital buildings; we seem to be under-resourced in terms of staffing in a number of these core services.

“We need to understand what level of service we want as a country and if we have to cut that back, that's fine, if that's what everyone agrees to. But if we want what we've got now, then that costs money and we've got to pay for it.”

Cuthbertson says Caanz has been bringing up its views when socialising with most of the major political parties but isn’t expecting any quick breakthroughs.

“It's a multi-pronged focus, because you've got to change people’s perceptions to bring them around. You’ve got to get people to see the need for it and why it and would be fair.”