Income tax measures
As promised, we have already established a Tax Working Group to recommend how to create a better balance in our tax system. Getting these signals right is a vital step towards improving the long-term sustainability and productivity of the economy.
Based on the Budget papers, the Government has not proposed any significant tax reform policies. However, throughout the budget papers, various references are made to the Tax Working Group (TWG), an independent body tasked with providing recommendations to the Government that would improve the fairness, balance and structure of New Zealand’s tax system. The TWG is due to report its final recommendations in February 2019, and although these final recommendations are yet to be seen, it is clear that the TWG will remain a key driver of significant tax reform in New Zealand going forward.
Separate from the TWG’s recommendations, the Government has released its new revenue strategy, which sets out the Government’s objectives for the tax system and tax policy in the context of its economic and fiscal strategies. Although there are a number of items on the agenda, of particular interest are the proposed R&D tax credit, ring-fenced rental losses, Winston Peters’ “bloodstock initiative”, black hole and feasibility expenditure, and the international tax and base erosion and profit shifting proposals. The bulk of these proposals are likely to be implemented within the next year.
Budget 2018 begins steps to restore tax fairness. More funding is being given to Inland Revenue to crack down on tax dodgers. This is expected to recover more than $183 million over the next four years.
The Government will be providing an additional $31.3 million in operating spending to Inland Revenue to collect more taxes and, in particular, to ensure outstanding company tax returns are filed. The additional funding will be provided to the Inland Revenue in the current year and, based on budget forecasts, is expected to raise revenues in excess of $183 million.
Interestingly, the Government tax policy work programme carries on this theme. Topics in the work programme include the following:
- developing an optimal regime to maximise compliance including addressing corporate fraud and evasion
- drafting a discussion document containing proposals on various GST policy issues
- considering options to address the under-reporting of income and therefore under-taxation of the self-employed.
- considering the tax treatment of carrying forward losses when business ownership changes
- developing a framework for tax administration with an emphasis on the key roles of the Commissioner, taxpayers and tax agents, as well as the rules around information collection and tax secrecy which underpin their interactions, and
- improving the tax system for business, including the calculation of provisional tax, the collection of information and reviewing the penalties and interest rules (including researching additional measures that have potential to deliver further benefits to businesses, reduce compliance costs and make the tax system simpler).
(Source: Government tax policy work programme 2018-19)
Other recently announced initiatives will reduce distortion in the tax system. These include ring-fencing rental losses and closing the loophole on offshore companies avoiding GST on low-value goods sold locally.
Unsurprisingly, the housing market remains an area of focus for the Government. Earlier this year, the two-year bright-line test (which imposes income tax on capital gains derived on the disposal of residential property within two years of acquisition) was extended to five years.
Off the back of this amendment, the Government is proposing to implement rules to ring-fence tax losses arising from investment properties. This would mean that where costs involved in owning a rental property, such as repairs and maintenance and interest, exceed the rental income from that property, the resulting loss cannot be claimed against other forms of income.
Aside from raising revenue, the Government’s rationale for implementing these rules is to reduce property speculation and encourage investment in more productive assets.
This idea was recently floated in an issues paper from Inland Revenue and Treasury, and submissions on the proposal only closed on 11 May. Despite this, it appears from the Budget papers that the Government will go ahead with the proposals, which are expected to be implemented in the 2020 income year. The Budget forecasts revenues of $10 million in the 2020 income year followed by revenues of $125 million and $190 million respectively in the 2021 and 2022 income years.
On the GST front, the Government has confirmed it will proceed with its plans to require offshore suppliers of low-value goods to register, collect and return GST. The GST proposals are likely to come into effect during the 2020 income year, with the Budget forecasting revenues of $218 million between 2020 and 2022.
Interestingly (but somewhat expectedly), the Budget papers announce changes to the bloodstock tax rules for the New Zealand racing industry. Under the proposed changes, tax deductions will be able to be claimed for the costs of high-quality horses acquired with the intention to breed. This proposed amendment is intended to address the current rules around tax write-downs which, according to the Budget papers, do not serve their purpose of promoting new investment, but rather favour established breeding businesses. These proposed amendments will cost the Government approximately $4.8 million over the next five years, beginning from the 2020 income year.
This is why Budget 2018 gives a major boost to innovation, with $1 billion over four years to finance a tax incentive for more Research & Development by Kiwi businesses. We have committed through the Coalition Agreement with New Zealand First to lifting our Research & Development spending as a country by 50 percent – to 2 percent of GDP inside 10 years.
Prior to the release of the Budget papers, a discussion document was released seeking comments on a proposed research and development (R&D) tax credit. The discussion document proposes a 12.5% non-refundable tax credit on eligible expenditure to businesses performing R&D in New Zealand and is expected to be available from 1 April 2019. The proposed R&D tax credit is intended to supplement the “R&D cash-out” incentive currently targeting innovative start-up companies and the Callaghan grant system.
As seen in other countries, a well-designed incentive can lead to increased innovation activity and overall productivity. Conversely, a poorly designed incentive can lead to high fiscal costs with little improvement in innovation. Based on Budget forecasts, the proposed R&D tax incentive is anticipated to cost the Government in excess of $1,024 million over the next five years. However, depending on the final design and real-life application, the forecasted cost of the incentive could be understated.
For the R&D incentive to have a positive impact on productivity it should not share the same fate as the previous Labour Government’s 15% R&D tax credit (which lasted only a year before it was repealed). The proposed R&D tax credit should instead be sustainable, with a long-term commitment from the Government. In addition, significant resources should be committed to make the claims process easy and capable of being audited.