In an address to the International Fiscal Association’s (IFA’s) conference on 1 March 2019, the Minister of Revenue, the Hon Stuart Nash, focussed on the Tax Working Group’s recommendations and the next steps, the Government’s tax policy work programme, and Inland Revenue’s business transformation.
Tax Working Group
The Minister advised that the Tax Working Group’s final recommendations on a broad extension of the taxation of capital gains and other recommendations made by the Group were not binding on the Government. The Government would need to review the report thoroughly and seek advice from Treasury and Inland Revenue before making any decisions. The Minister said there was also a substantial process that included Cabinet approval of any recommendations, let alone the legislative process framework before anything could be implemented. The Government expected to make a full response in April 2019. Any changes the Government decided to make would be made by introducing legislation. Any changes would not come into force before 1 April 2021, after the next election.
Tax policy work programme
The Minister noted that the Government has already taken a number of steps to support families, increase the fairness of the tax and transfer system, and ensure that all taxpayers pay their fair share of tax.
The Minister noted that legislation has been introduced in the Taxation (Annual Rates for 2019-20, GST Offshore Supplier Registration, and Remedial Matters) Bill to ring-fence residential rental property losses. The proposed rules in the Bill are intended to ensure that investors will no longer be able to deduct expenditure relating to their loss-making residential investment properties from their other income (eg salary or wages, or business income) to reduce their tax liability. This will be done by allocating deductions for residential land to the next income year, to the extent those deductions exceed income from residential land. It is proposed that the rules apply in full from the start of the 2019/20 income year. In conjunction with the extension to the bright-line test, the Minister said that ring-fencing losses from rental properties would level the playing field between property investors and home buyers.
Digital economy/international work
The Minister said that the Government is putting more focus into international issues as the challenges facing the taxation of digital services ramp up at OECD. The Minister noted that an increasing number of countries have decided not to wait for an OECD solution but have adopted separate digital services tax, or DSTs, to tax the digital economy. The Minister said that New Zealand was participating in the OECD discussions and preferred an internationally agreed solution. However, New Zealand also needed to consider the desirability of a DST if this could not be achieved. The Minister noted that the Government will release a discussion document later this year canvassing all the issues and suggesting how a DST should be designed in case it was needed.
The Minister said that in its report, the Tax Working Group noted that New Zealand made relatively little use of environmental taxes relative to other countries and believed that taxation could be used further to enhance environmental outcomes. The Government welcomed the development of a policy framework for assessing when environmental taxes could be usefully applied as a tool for delivering positive environmental and ecological outcomes for New Zealand.
The Minister noted that the Tax Working Group had also taken an interest into how charities were taxed. The Minister noted that giving tax breaks to some commercial operators (who have a charitable owner) and not others potentially had a distortionary effect on the market that they operated in, in that privately-owned entities often competed in the same space. The Minister advised that the Department of Internal Affairs has released the discussion document “Modernising the Charities Act 2005” with a closing date for submissions of 30 April 2019. The full discussion document is at www.dia.govt.nz/charitiesact.
Research and Development tax credit
The Minister said that the Finance and Expenditure Committee is currently considering submissions on the Government’s R&D proposal and is due to report back to Parliament on 1 April 2019. (See Taxation (Research and Development Tax Credits) Bill (108-1) at www.legislation.govt.nz which proposes amendments to the Income Tax Act 2007 and the Tax Administration Act 1994 to introduce a research and development tax credit to incentivise businesses to perform research and development.)
Running in parallel with the tax policy work programme is Inland Revenue’s Business Transformation. The Minister said he was expecting three major outcomes to be delivered by 2021. These are:
(1) increasing voluntary compliance by having a simpler tax system
(2) making it easier and more efficient for Government to introduce policy change, and
(3) having a more versatile tax system that can adapt better to changing ways of working and different sources of revenue.
The next phase of improvements designed to make tax easier and more certain will be implemented by Inland Revenue this year (see Taxation (Annual Rates for 2018-19, Modernising Tax Administration, and Remedial Matters) Bill (72-2) at www.legislation.govt.nz).
The Minister said that Inland Revenue is about halfway through the transformation journey and that the programme of transformation will continue through until 2021.