On Thursday we will see what the Tax Working Group (TWG) has recommended to the Government. Of particular interest will be in how the TWG thinks the tax system should be balanced to better achieve fairness. We have outlined below our best guess of the recommendations of the TWG for this week’s edition of taxmail.

The Interim Report released in September 2018 covered a wide range of topics. The Ministers of Finance and Revenue response to the TWG asked for a revenue neutral package. Here is a short summary of the key issues:

The big ticket item is the taxation of capital income. The Interim Report showed that the TWG were aware of the many problems with a comprehensive capital gains tax. The design questions were to consider what trade-offs could be made in resolving them.
Assuming the open secret that capital income taxation will be a majority TWG recommendation, our best guess expectation of what they will recommend (with some comment) is:
 

(Whether these guesses are right will become clearer on Thursday.)
As a reminder, some capital gains are currently taxed in New Zealand. These have developed as problems have been identified by Government and Officials. A non-exhaustive list of capital gains already taxed includes;

• capital gains on financial arrangements (but not capital losses);
• certain land and buildings sold within then and now five years (the bright line test);
  
• employment restraints of trade;
• employee share scheme capital gains;
  
• land inducement payments
  
• property sold within 10 years by a person associated with a builder, developer etc.;
  
• capital gains distributed by companies;
  
• capital gains distributed by companies to certain non-resident shareholders;
  
• returns of capital by Australian companies that are not share cancellations;
  
• petroleum and forestry assets;
  

These extensions to taxable income have been implemented by Governments of various colours. Whether continued ad hoc extensions to taxable income is a better approach than a broader change will also be a key question.

In our submissions on the Interim Report, we noted:

• The reasonableness of the total package will be an important test;
• The trade-offs made to expand the taxation of capital income should result in as sensible as possible a regime to achieve the TWG’s terms of reference.

We also said it would be important to test and present the evidence for their decisions. (In large measure because we were concerned that Officials’ fears of the behavioural impacts of the proposal would add unnecessary complications to the recommended structure.)

The last TWG raised coherence and sustainability as key tests for a tax system. It recommended that a comprehensive CGT not be implemented as its benefits were not justified by the complications it would add.

This TWG’s terms of reference has added fairness. Thursday’s release will show how much difference that makes and whether a viable CGT can be designed for New Zealand.

We will provide our view of their answers and in the meantime, we trust we have helped with your thinking and response to the recommendations.

Yesterday the Government announced a May consultation on a digital sales tax. The press release is available here. There is little detail but other countries DSTs are likely to be considered. The justification, for New Zealand’s own DST ahead of an OECD consensus, is to correct an unfair and unsustainable lack of income tax. This signals that the fairness case is likely to have much greater sway in the Government’s acceptance of the TWG’s recommendations. Certainty on that point will have to wait until at least April.