Here’s why New Zealand needs tax reform

This article was current at the time of publication.

Capital gains tax, retirement policy reform, and regular reviews of public expenditure are needed in order to adapt to New Zealand’s changing economic landscape.

CPA Australia has advocated these measures in a submission regarding the Inland Revenue’s (IRD)  long-term tax planning exercise, which is currently in its consultation phase. The IRD is required to undertake this process every three years and will present its next “Long Term Insights Briefing” to the ministries of Finance and Revenue next year.

In the consultation phase, the focus is on the tax system’s future structure, namely terms of tax bases and the income and consumption tax regimes.

In particular, IRD’s consultation document, notes New Zealand’s ageing population will have “significant implications for the future of New Zealand’s tax system”.

A grey future for New Zealand

The future population will be larger and older; the current median age is 38 and by 2073 it will be 47.

In 2022, 25 per cent of New Zealanders were 65 or older; by 2073 that will almost double to 48 per cent.

According to Treasury’s 2013 long term fiscal position paper Affording Our Future, the resultant pressure on healthcare and superannuation costs could double government core expenditure over the next 40 years.

CPA Australia’s submission points out tax policy alone won’t be able to address these and other challenges such as low productivity growth, housing affordability, debt levels and technological disruption.

Governments will also need to regularly review Crown expenditure and retirement income policies.

Capital gains tax

On the tax front, the submission argues New Zealand’s current tax system doesn’t provide a genuinely broad-based and low-rate structure.

One omission is the absence of a general tax on income from capital gains which, IRD points out, makes New Zealand unusual among OECD countries.

CPA Australia supports the introduction of a capital gains tax (CGT) but notes political sensitivity requires “ongoing dialogue” with key stakeholders to “foster a constructive discussion on what a workable CGT could look like for New Zealand”.

“The pros and cons of alternative approaches should be explored as part of this review, such as grandfathering rules so that the new rules apply to assets purchased after a specific date (such as Australia’s pre- and post-CGT concept), incorporating inflation adjustments to tax only real gains, introducing exemptions or concessions for personal use assets or small businesses, and implementing roll-over relief for reinvested gains.”

The submission notes that, while some European countries have implemented wealth, inheritance and estate taxes, their success and sustainability “remains contentious”.

New Zealand would face the real risk of exacerbating “outmigration” to Australia if such taxes were introduced. They would also encourage tax avoidance by high-net-worth individuals and could benefit foreigners at the expense of domestic investors.

GST

CPA Australia also advocates examining the GST as its flat rate structure “may hinder its responsiveness to changing economic conditions and demographic trends”.

Raising the GST rate could simplify the tax system and broaden the revenue base.

Concerns that higher GST rates disproportionately affect lower-income households, worsening inequality, could be addressed by adjusting the tax and transfer system to compensate low-income taxpayers through targeted offsets.

Land taxes should also be evaluated, the submission argues, as land is immobile and less likely to be affected by market distortions.

Corporate rate

CPA Australia advocates a more aligned tax structure that reduces discrepancies among the personal, corporate and investment vehicle income tax rates.

Angus Ogilvie FCPA, Chair of CPA Australia's New Zealand tax committee, said tax structuring had now become inevitable due to the misalignments of recent years between these rates.

The delta between the top personal rate and the company rate is now 11 per cent.

"Governments should think very carefully before creating these deltas, as harmonised rates enhance New Zealand's attractiveness to foreign and domestic investors alike," he notes.

The submission argues New Zealand’s corporate tax rate, currently set at 28 per cent, has become less competitive compared to other OECD countries, raising concerns about the potential negative impact on investment and economic growth.

It maintains that the corporate tax rate “effectively serves as little more than a withholding tax [as] many shareholders ultimately face additional taxation at their marginal rates, which diminishes the impact of any corporate tax reductions”.

By more closely harmonising the tax rates, New Zealand can enhance its attractiveness to both domestic and foreign investors, fostering a more conducive environment for economic growth, the submission says.

Retirement income

Retirement income policy should be subject to regular review to ensure it adjusts to the challenges posed by an ageing population.

CPA Australia points out New Zealand is an outlier among OECD countries in relying on general taxation to fund public pensions (New Zealand Superannuation).

Governments will need to consider making KiwiSaver compulsory; means-testing New Zealand Superannuation; examining how superannuation contributions to funds should be taxed, for example by considering the Exempt-Exempt-Taxed principle; and increasing contributions progressively.

Along with regular retirement policy reviews, CPA Australia’s submission argues government expenditure should be subjected to regular review.

Focusing on the effective allocation of public funds could potentially reduce the need for frequent tax adjustments and promote a more stable tax environment, the submission says.

It also notes technological advances pose threats to the tax base, such as more New Zealand employees working offshore for New Zealand employers, and the further automation of manual labour.

“Shifts in the balance between labour and capital will need to be addressed to ensure the tax system remains fit for purpose.”