The New Zealand economy has suffered as a result of the costs connected with the COVID pandemic and subsequent lockdowns. Like many jurisdictions it is suffering from inflation as a result of labour shortages, over stimulation of the economy by the Reserve Bank and other factors. The Reserve Bank is now overtly engineering a “little recession” by ramping up interest rates, as is occurring in most western economies.
The economic problems for New Zealand have also been exacerbated by some significant weather events this year, which are estimated to have an economic impact (including remedial expenses) possibly up to NZ$10 billion.
Arguably the consequences of these various events have been worsened as a result of the incumbent centre left Government spending in a profligate fashion (at least in my view), with the double negative that much of that expenditure is not actually achieving the outcomes intended, or is on ‘nice to have’ initiatives rather than essentials, given the difficult economic environment.
The minimum wage has risen over the last five or six years by 44 per cent (most of this occurring before inflation picked up), and without a matching increase in productivity. In addition the Government has increased its own expenditure by an unbelievable 65 per cent since the Labour Coalition Government was first elected in 2017.
Government debt as a percentage of GDP has increased significantly, with the current account deficit at its highest since 1988 (when first recorded).
As we are in an election year, one would not expect any tax changes to occur prior to the election, however it is inevitable that changes will occur after the election, depending upon whether a centre left or centre right coalition ends up in Government. The purpose of this article is to indulge in a little bit of crystal ball gazing as to what changes might occur depending upon the outcome of the election.
After its re-election in 2020, the Labour Government increased the top tax rate from 33 per cent to 39 per cent, in respect of income above NZ$180,000 per annum. This is for personal tax: the trustee tax rate remained at 33 per cent and the corporate rate remained at 28 per cent. This took us back to the situation under the previous Labour Government elected in the late 1990s, which increased the top personal rate to 39 per cent, although it kicked in at a much lower threshold. The differential rate between the top personal rate and the trustee rate of course incentivised the use of tax planning to minimise the level of personal income earned by high earners. This incentive has of course been refreshed under the current Government, and the New Zealand Inland Revenue Department (IRD) have put taxpayers on notice that there would be careful scrutiny of arrangements that might be considered to constitute tax avoidance.
In addition, the Government introduced a more detailed tax reporting regime for domestic trusts, with the data gathered no doubt intended to identify tax avoidance or tax planning, and also to allow the Government to develop its tax policy in new ways which might result in specific legislation designed to limit planning.
Labour Led Coalition Government
If the Labour Government manages to put together a coalition to govern the country after this election (they are almost certainly going to be unable to do that on their own as is presently the case), then we can expect the gloves to come off in terms of further tax initiatives. The Green Party, which is a likely coalition partner, is further to the left than Labour and would be keen on all manner of things including a wealth tax and a capital gains tax (CGT). It is very unlikely however that a wealth tax would be introduced as it is at the more extreme end of the spectrum from a tax policy perspective, and would likely result in the Government introducing it to be punished at the next election. This, combined with the fact that wealth taxes appear to be falling out of favour in many overseas jurisdictions, plus the harshness of the tax in terms of imposing a tax burden where there has been no taxable event such as the derivation of income or the generation of a capital gain, means that its introduction is a remote possibility.
CGT tax on the other hand is definitely a possibility, particularly given that the previous Prime Minister assured the country that there would be no CGT introduced under her leadership. Now that she is no longer the Prime Minister that possible constraint is no longer in place, and the Government could look at the matter afresh.
New Zealand is unusual in not having a CGT, even though various tax reform committees and other parties have been suggesting since the mid-1960s that it is a gaping hole in our tax system, and it does penalise those that generate income from their personal exertion, compared to those who are lucky enough to generate gains from capital assets which suffer no taxation. New Zealand does have a number of specific capital gains taxes (such as in relation to financial arrangement income and certain property transactions), but it does not have a broad based CGT. A Working Group under the Labour/New Zealand First Coalition Government elected in 2017 did look closely at it, but proposed a very harsh CGT with limited exemptions, and it required the valuation of assets at the commencement of the regime. By contrast the Australians in the 1980s sensibly exempted from CGT assets held prior to the commencement of their regime. They also offered (initially) an inflation-adjusted CGT (subsequently changed to a simple 50 per cent discount in many cases on the nominal gain). Neither of these options were considered by the Working Group.
Another possible outcome under a new Labour Coalition Government might be an additional “super” tax rate above the 39 per cent rate, kicking in for high earners at a higher level than the current NZ$180,000 threshold.
Apparently only two per cent to three per cent of individual taxpayers were affected by the 39 per cent rate, so clearly that is not a significant part of the electorate, and if a new super rate was applied for earnings above (for example) NZ$300,000 this would have even less impact, of course.
While such tax rates are commonplace in other western jurisdictions, New Zealand tax thresholds are generally quite low. The previous top tax rate of 33 per cent now kicks in for taxpayers earning not much above the minimum wage.
This type of tax is something of an “envy” tax as it does not gather a great deal of additional revenue.
A CGT would be more effective and have a broader base and arguably would be more equitable as long as there were reasonable exemptions including of course the family home.
Interestingly, over the last six years the tax collection has increased substantially, with NZ$40 billion more tax collected this year than six years ago. Aside from the increase to the top marginal rate, a significant part of this increase is attributable to so-called “bracket creep” (fiscal drag), as a result of increased wage rates and the like. This will of course increase in an inflationary environment. However, notwithstanding this substantial increase, Government expenditure has increased by the huge amount of 65 per cent since 2017. A Labour Government would be unlikely to take the scalpel to some of the expenditure even though there is enormous scope for trimming the bloated central Government bureaucracy and “nice to have” but not essential initiatives.
National Led Coalition Government
The National Government had proposed the introduction of some tax cuts if it was re-elected in 2017, and thanks to careful fiscal management those tax cuts would have been justified and sustainable. However, if a National Government is elected after this election it will have to deal with the economic issues canvassed above, and will have a lot of work to do to rein in Government spending.
The National Party had made comments over the last couple of years to the effect that they would remove the 39 per cent top rate, but given the current financial position of the country and the state of the global economy, I suspect that will not be feasible in the short term, particularly in light of the recent weather events.
There is no way that a wealth tax would be on the table, and it is unlikely that a CGT would be part of National policy.
A National led Government would also be likely to modify the “Brightline” property tax that was introduced by them prior to the 2017 election, and subsequently changed quite significantly by the Labour/NZ First Government.
This was introduced by National in response to an overheated residential housing market where there was a justified concern that there were many people buying and selling in short periods to generate speculative gains. Whilst there were existing taxing provisions which enabled the Government to tax gains on properties purchased with the intention of resale, a Brightline two year period was introduced so that any purchase and subsequent sale of residential property (other than the owner occupied home) which occurred within two years of acquisition would result in taxation of the gain.
The Labour Government extended this first to five years and then (ridiculously) to 10 years. Those changes had no coherent tax policy basis as the thrust behind Brightline was to suggest that a quick sale (i.e., two years) would be deemed to be a transaction linked to an intent at the time of purchase. Such a deeming treatment is hardly fair in the case of a five year period and makes no sense whatsoever in relation to a 10 year period. A consequence can be that if a person’s financial circumstances change and they are compelled to sell a rental property (and this is a very live issue given the rapid increase in mortgage interest rates), they would be taxable on any gain derived.
I think it likely that a National led Government would reduce this Brightline period back to two years. They would also reinstate interest deductibility for mortgages on rental property, which was removed by Labour for no coherent tax policy reason.
There is no likelihood of National introducing a “super” tax rate above 39 per cent, and it is likely that if they do manage to get the books into better shape supported by economic recovery in the next few years, the Government may choose to remove the 39 per cent tax rate.
One thing that National have clearly signposted is that they will index marginal tax rates to inflation so that bracket creep/fiscal drag does not occur.
John has specialised in tax and trust law since 1984. John provides tax and trust advice to a wide range of New Zealand and offshore corporate and private clients, and not-for-profit organisations. The majority of his work is cross-border/international in nature. John is a frequent presenter at conferences in New Zealand and internationally and has authored numerous publications on tax and trust law issues. He was a part-time Teaching Fellow at the University of Auckland for the Master of Taxation Studies degree. John was Founding Chairman of the New Zealand branch of STEP and has served as a STEP Worldwide Council member.