A comprehensive capital gains tax has been recommended by the Government’s Tax Working Group, which estimates the $8 billion raised over five years could go towards changing the bottom tax rate and reducing tax on KiwiSaver for low- and middle-income earners.
Tax Working Group chair Sir Michael Cullen said the capital gains tax recommendation came about through "concerns about the structure, fairness and balance of the tax system".
"New Zealanders earning just salary and wages are taxed on their full income, but we have several situations where you can earn income from gains on assets and not be taxed at all."
He said it was not a "jack-up" by the Labour Party to implement their own policies, and emphasised the recommendations were currently proposals.
What a Capital Gains Tax would look like
The working group recommended the introduction of a comprehensive tax on capital gains, treating it as an income on assets such as investment properties, land, shares and business assets.
The family home, personal and household items, cars, boats and art would not be included.
The working group called New Zealand’s lack of a comprehensive capital gains tax as "regressive", labelling it as inconsistent treatment of capital that benefits the wealthiest. It also said it would close tax loopholes and push Government from a reliance on wage and salary tax, allowing a reduction in this area.
It estimated a capital gains tax could bring in $8 billion in the first five years, meaning income tax rates could be reduced.
Sir Michael said issues that could arise from a capital gains tax could be a "lock-up" with people delaying selling their asset, discouragement in investment and revenue volatility. He said if it were to be implemented, there needed to be assistance from countries with similar capital tax such as Australia or Canada.
Tax reductions
In addition to the capital gains tax, the working group suggested adjusting New Zealand’s lowest tax rate of 10.5 per cent.
Currently the initial earnings of workers’ $0-$14,000 is taxed at this rate. The group said that allowing New Zealanders to earn more at this rate would benefit all workers, support those transiting to work and would reduce inequality.
The Working Group proposed two options, the first rising the 10.5 per cent income bracket to $0-$22,500 or $0-$20,000 for personal income tax, adjusting the next 17.5 per cent bracket from $14,001-$48,000 to $22,501 or $20,001-$48,000.
The second option would change the 10.5 per cent bracket to $0-$30,000, making the 17.5 per cent bracket to $30,001-$48,000.
If the changes were implemented, the "ordinary" New Zealand worker could possibly see $15-$16 a week from the recommended tax reduction.
Changing the lowest tax rate would be going back to an alteration the previous National Government had planned to implement, increasing the 10.5 per cent bracket from the current $14,000 to $22,000. That was alongside changes to the two middle income brackets, with the changes dropped by the Government to be reallocated through the families package.
KiwiSaver tax reductions
It suggested a targeted tax reduction for the employer contribution by low- and middle-income earners to encourage savings, as well as refunding the Employer Superannuation Contribution Tax for KiwiSaver members earning less than $48,000.
Environmental changes
The working group said the New Zealand tax system could place taxes on "harmful activities", with Sir Michael saying there were opportunities to address greenhouse gases, water pollution, solid waste and transport and congestion and "to make the Emission Trading Scheme work more as a carbon tax over time".
He said the group supported a tax on water extraction but the issue of Māori rights on water needed to be addressed first.
"It’s not as difficult of an issue" as many thought, he said, adding there needed to be someone "brave enough" to work on the issue.
Business
Reinstating depreciation on buildings, changing "black hole" reduction rules and changes to loss continuity rules were recommended by the group.
Government response
Revenue Minister Stuart Nash said the Government would "take a measured response" to the report that highlights "some unfairness" in New Zealand’s tax system.
Finance Minister Grant Robertson said it was unlikely that all the report’s recommendations would be introduced, and a response would be released in April.
Any legislative changes passed by the Government would only come into force in April, 2021 in order to give the New Zealand public a chance to vote at the 2020 election for the changes.
Yesterday, National finance spokesperson Amy Adams said the Government were "mistaken in thinking it can maintain that momentum and lift productivity by taxing more or that a Capital Gains Tax is the answer to a multitude of problems".
"Economic growth averaged more than 3.5 per cent in the last three years under National," she said.
"National favours sensible economic policies that encourage growth and investment, keep the cost of living as low as possible and let New Zealanders retain more of what they earn. That’s the best way to ensure more jobs are created and that all our communities can prosper."
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