21 Feb 2019

The Tax Working Group to release findings on tax review: What to expect

8:39 am on 21 February 2019

The Tax Working Group will reveal its long-awaited recommendations on the tax system this morning with politicians busy positioning themselves for any reference to a capital gains tax.

Open home sign at a house for sale in East Auckland

The Tax Working Group was asked to look at a capital gains tax, company tax and environmental taxes but with some no-go zones: It was not to touch income tax, GST rates or tax on inheritance. Photo: RNZ / Claire Eastham-Farrelly

The group was set up by the coalition government to examine the whole tax system; to see whether it was operating fairly and, if not, what should be changed.

It was also specifically asked to look at a capital gains tax (CGT), company tax and environmental taxes but with some no-go zones: It was not to touch income tax, GST rates or tax on inheritance.

This was all against the background of an ongoing and increasingly heated political debate about CGT.

Labour campaigned on it for several elections but the policy was dropped by then leader Andrew Little after the 2014 election, viewing it as politically unpalatable.

However, it was quickly adopted again by Jacinda Ardern who believes it is a way to correct generational and socio-economic inequalities.

She had to modify her position in the middle of the 2017 election campaign after getting hammered by National over tax policy.

The Greens are fully in favour of a "comprehensive" CGT, also excluding the family home.

Its co-leader James Shaw pushed the boat out even further last week, questioning whether Labour, his party and coalition partner New Zealand First should be re-elected if it could not get a CGT over the line.

NZ First and its leader Winston Peters have actively opposed it, saying before the election a CGT was "off the table" as it was ineffective and unfair.

National has been adamantly opposed to a CGT but introduced the "bright line" test while under pressure in government over housing affordability. That acts somewhat like a CGT when residential homes are resold within a set period.

Under National it was two years, but that was extended to five years by this government. The main family home and homes inherited as part of an estate are exempt.

But National has already started its offensive, warning of a "big hairy-chested capital gains tax".

NZ First is starting its messaging around the bright line test, already putting it out there that any changes to taxing capital income will only be an extension of what was introduced under National.

In its interim report, the Tax Working Group found there were inconsistencies with the way capital income was taxed compared with income from labour which created inequalities benefiting wealthier New Zealanders.

The group also warned that with an ageing population New Zealanders would be increasingly reliant on capital income in retirement, concluding: "A tax base that is sustainable over time - and that is fair in an intergenerational sense - will need to draw more upon capital income as well as labour income".

Its recommendations did not include a straight CGT but it did present two alternative options.

The first was taxing any gain from the sale of assets at roughly the marginal income tax rate; the other was to tax a portion of the value of certain assets, for example rental properties, annually.

But the group also noted it was "still forming its views" on the best approach toward extending the taxation of capital income and the options represented its "initial thinking".

The report also concluded there was a place for environmental taxes to force changes to behaviour, and there could be benefits in expanding the coverage of the Waste Disposal Levy, strengthening the Emissions Trading Scheme and "advancing" congestion charges.

Later this morning the group will release its final findings.

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