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Tax revenue - where to now?

Tax revenue - where to now?

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John Cantin - KPMG NZ - Partner

Partner - Tax

KPMG in New Zealand

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After the intense focus on tax, because of the Tax Working Group (TWG), Budget 2019 delivers a business as usual tax take.  There is little change, apart from those tax measures already working their way through Parliament. The spending focus of Budget 2019 is funded by a forecast growing economy and debt rather than tax changes.

Future tax changes will be driven by Government decisions on its tax policy work programme. This article looks at what we might expect.

Increasing the tax take

Tax revenue is simple. It equals tax base x tax rate.

Increasing revenue, without increasing tax rates, is a matter of making the tax base larger. This can be done with ’big bang’ changes like introducing a GST or a general capital gains tax. Or, it can be done by making ad hoc changes to the tax treatment of particular income and expenditure. 

These latter ‘base maintenance’ measures have successfully increased tax revenue without being seen as tax hikes (and certainly, with some exceptions, have not been marketed as such). All colours of Government have done this.

A key form of base maintenance has been making specific capital gains taxable. There is a long list of capital gains which have become taxable through changes to specific types of income and assets. A recent example is the bright-line test for taxing residential rental property sales. It was introduced by the previous National Government and the bright-line period extended to five years by the current Government (again, demonstrating that all Governments have done this).

No CGT, no big bang changes

The Government’s decision to not proceed with a capital gains tax leaves open its tax policy work programme. Our expectation is that a reset will focus on ’business as usual’ and base maintenance rather than other big bang changes to the tax system, such as new environmental taxes. 

But increasing tax revenue is the priority

However, the spending focus of a ‘Wellbeing’ Budget requires additional tax revenue, so of course changes which increase tax collections will receive priority.

The recent proposal to collect more GST from telecommunications services is an example. In the context of the total tax take, the revenue raised is expected to be relatively small (the Budget documents disclose tax of $71million over the forecast period). However, it is on a faster track than other possible GST changes. These other GST changes include modernising the system to reflect the ways technology is affecting how business is done. These would not increase the tax take however and are on a slower track.

By contrast, measures which clearly reduce the tax take will be pushed out.

The Government’s TWG response to the non-capital gains tax recommendations was in five parts. The three most relevant were: ‘work is already underway’, ‘consider for the work programme’, and ‘consider as a high priority for the work programme’. The big ticket item in the TWG’s business tax recommendations was the re-instatement of some building tax depreciation deductions. This was a ‘consider for the work programme’ item, which is seen as code for deferral and probably not implemented at all.

With the work programme due to be refreshed in June, final decisions will be known then.

So what can we expect from the tax policy work programme update?

Some possible changes we may see in the future are:

  • Ensuring contractors pay their tax. This is by increasing the types of income that is reported to Inland Revenue by income payers, extending withholding of tax to those payers, and increasing Inland Revenue’s audit resources.
  • Preventing ‘tax loss trading’. This was a concern raised by Officials through the TWG process and is focussed particularly on trading of trust tax losses. Changes to tax loss carry forward rules for trusts will be considered.
  • The closely-held company tax rules and enhancing their enforcement. Officials have raised perceived problems with the 33% top tax rate not being paid on profits of closely-held companies. This arose from Inland Revenue looking into sales of companies where the 5% tax “top-up” was not paid. A capital gains tax on share sales would have reduced those concerns (as the gain would be taxed on sale at marginal rates). In the absence of this, Officials’ advice to the TWG focused on possible rules to deem company sales and loans to shareholders as taxable income. In KPMG’s submission to the TWG we suggested an integrated tax system, where shareholders rather than companies are taxed. This would also solve some of these perceived problems. It would however require significant change and careful consideration of the consequences before being implemented.
  • Taxing certain land sales and building depreciation. The TWG were largely supportive of taxing land sales. The TWG also recommended considering re-instating building tax depreciation and tax relief for seismic expenditure. Although the capital gains tax decision removes some of the focus, the issue of the border between revenue and taxable gains and capital and non-taxable gains will remain. It is clear from industry publications that a total return approach is generally taken – it is the rental return and the increase in value which is considered as a whole. If the current ‘dominant’ purpose test for taxing land sales is retained, the building tax depreciation rules may remain unchanged as a buttress to not taxing capital gains.
  • Taxing digital services. The Government had already announced it will consult on a digital services tax. A discussion document is due in May but has not yet been released. This is labelled as a “fairness” issue. It is a particularly difficult area of tax policy. There are conflicting objectives of different countries as well as businesses and consumers. The risk New Zealand runs is introducing a tax which acts as a tariff and creates barriers to trade. The OECD is also running a process to reach a multilateral solution. This may give parts of New Zealand’s tax base to other countries. Although the Budget indicates that New Zealand’s preference is to move in line with the OECD, it leaves open the possibility of the Government introducing its own set of rules ahead of the OECD’s efforts. 

Our view

Tax is less of a centrepiece in Budget 2019 than the TWG’s final report might have suggested. It is very much a case of business as usual pending decisions on the TWG’s non-capital gains tax recommendations. The focus of those recommendations, and other changes, is likely to be very much on raising tax revenue.  

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