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.
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).
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.
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.
Some possible changes we may see in the future are:
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.