Tax Working Group Chairman Michael Cullen on taxing capital gains, environmental taxes, incentives for retirement savings & applying GST to financial services

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Michael Cullen.

Tax Working Group (TWG) chairman Michael Cullen says it’s not safe to assume the government appointed group will recommend extending the taxation of capital income in some form in its final report.

The TWG released its interim report on Thursday, saying it has decided to work “in substantial detail” through the policy choices involved in the design of an extended taxation of capital gains, or income.

Two main options are under consideration being; an extension of the existing tax net through the taxation of gains on assets that are not already taxed; and the taxation of deemed returns from certain assets known as the risk-free rate of return method of taxation. The interim report says the TWG has made good progress in determining what income might be included from certain assets, and when this income might be taxed, but still has much work to do.

Cullen told interest.co.nz that despite the options on the table, it’s not safe to just assume some sort of new capital gains tax will be recommended in the TWG’s final report, which is due in February.

“I don’t think it’s safe to assume that’s definitely the case,” says Cullen.

There’s still a lot of work to do he says, including weighing up the costs and benefits of such a move.

“We still have a lot of detail to work through. There’s still a lot of questions to be asked and we’ve yet to get feedback on some of the answers we’ve already given, which may give us pause to think again about some of those,” Cullen says.

“So it’s not a foregone conclusion at this point at all.”

Finance Minister Grant Robertson issued a letter to Cullen after the release of the interim report. In it Robertson requests the TWG’s final report examines whether a tax on realised gains, or the risk-free rate of return method of taxation, or a mix of both, is the best method for extending a potential capital income tax on specific assets – with the goal of ensuring New Zealand’s tax system is fair and balanced. 

For the final report Robertson has also asked the TWG to include measures that could result in a revenue neutral package.

A carrot and stick approach for farmers

The interim report delves into environmental taxes in some detail. It notes New Zealand is ranked 30th out of 33 OECD countries for environmental tax revenue as a share of total tax revenue. It also notes agriculture’s presence outside the Emissions Trading Scheme (ETS), and says the TWG is aware of “a number of existing tax concessions for agriculture in the Income Tax Act.”

Asked about this Cullen says the key issue is how to move to a fully sustainable economy quickly. He says carrots and sticks ought to be offered to ensure NZ gets ahead of international competition and has a marketing edge around sustainable agriculture production that the country currently lacks.

“So much work has gone into the Emissions Trading Scheme that our preference is to stick with it, continue the process of improving it…but also ensure there’s a solid floor to that Emissions Trading Scheme, which will perhaps rise over time so that there’s a real incentive upon farmers to switch to more favourable modes of production, more sustainable management systems around that, and also things like looking at nitrate taxes.”

“I would make the point very strongly that I think it’s important that revenue is substantially recycled back into primary sectors to accelerate the ability of farmers to make those changes,” says Cullen.

More to come on savings incentives?

Elsewhere the TWG is recommending a package of “modest incentives” for retirement saving targeted at low and middle-income people.

The recommendations are that the Government;

1) Remove employer superannuation contribution tax (ESCT) on the employer’s matching contribution of 3% of salary to KiwiSaver for members earning up to $48,000 per year. 

2) Implement a five percentage point reduction for each of the lower PIE rates, applying to savings in KiwiSaver accounts. 

3) Consider ways to simplify the determination of the PIE rates, which would apply to KiwiSaver.

4) Says it will give further consideration to the taxation of savings in its final report, in light of its broader conclusions on the tax system.

Cullen says the TWG may ultimately push the boat out further in this area depending on what it recommends around capital income taxation.

‘Banks aren’t charities’

Meanwhile, Cullen says it’s fair to say the TWG has had a good look at applying GST to financial services and wants to do so, but isn’t sure how to. 

“Absolutely. There’s no really efficient method of doing it which doesn’t have a lot of countervailing or negative factors come into play.”

“Banks aren’t charities. If you levy a tax on transactions they will pass those costs onto their clients, but may well pass it on in such a way that they favour their larger clients because obviously they’re their most valuable clients, they’re the ones they most want to keep. So it would actually end up being a regressive tax on expenditure, or even on income which is not what people think it is. They think it’s taxing banks. But [you] end up actually taxing pretty much anybody, but possibly taxing people more proportionately on low incomes than those on very high incomes and large corporates,” Cullen says.

The interim report says there’s a strong “in-principle” case to apply GST to financial services, but there are no obviously feasible options for doing so, concluding the Government should monitor international developments in this area. In terms of financial transaction taxes the report says these are inefficient and unlikely to raise significant revenue for NZ. The Government ought to monitor the international debate, but the TWG doesn’t recommend the introduction of such a tax at this point.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.

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