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Opinion: Tax is a topic for future Budgets

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By Alison Pavlovich and Dr David Sutton.

In anticipation of this week’s Budget, we have been asked several times whether there is an expectation of any tax changes being announced. And invariably the answer is ‘no’. This will be a Budget based on spending decisions – not revenue collection. There are a few reasons for this.

First is the new Labour Government have already repealed the tax cuts proposed by the previous National Government. So we must read this as a sign – no tax cuts expected from this Government in the near future.

The second reason is there are a number of Labour Government-initiated tax proposals in the pipeline already. Since the new Government came into power late last year, we have seen discussions around research and development incentives, a proposal to ‘ring-fence’ rental property losses and, just this month, a proposal to start imposing GST on low-value imported goods.

Third is the formation of the Tax Working Group. This group, led by Sir Michael Cullen, has been asked to look at some big tax issues. These include considering whether New Zealand should have a capital gains tax, should we consider a progressive tax rate for companies (as Australia has recently introduced) and whether tax can be used to make a positive impact on the physical environment.

Beyond the Budget – is a capital gains tax on the cards?

So, looking beyond the Budget, we anticipate a recommendation from the Tax Working Group that New Zealand should introduce a capital gains tax. New Zealand tax policymakers tout our tax system as “broad base low rate” and, generally, this is true. However, the current lack of a capital gains tax leaves a fairly obvious gap in our “broad base”.

This has not gone unnoticed by the OECD, which has recommended New Zealand introduce a capital gains tax to enhance fairness and economic efficiency in our tax system. This is not to say the OECD is always right but we must ask ourselves, why is New Zealand the only OECD country that lacks a comprehensive capital gains tax? Failure to tax capital gains creates unfairness because it favours those whose increase in wealth happens to be ‘capital’ in nature – which is rather arbitrarily distinguished from income that is ‘revenue’ in nature. That is, income from disposal of one’s assets is not taxed, while income from selling one’s personal services as an employee is taxed. Failure to tax capital gains creates economic inefficiency because it distorts investment choices. For example, it is preferable, tax-wise, to buy an investment property in Auckland than to invest in a new business.

We are disappointed that the parameters of the tax working group’s work is constrained by the fact they have been told to exclude the family home from any proposals. Arguably, excluding the family home will result in a capital gains tax that fails to achieve the equity it could do if all assets were included. Sadly, it appears this Government is prepared to sacrifice that equity in favour of political popularity.

Even if the Tax working Group recommends a comprehensive capital gains tax, there is no guarantee the Government will be able to get it over the line with its political partners. By the time all the negotiations take place, the watered-down version may lack the integrity it could have had – but that’s a discussion for another Budget in about three years’ time.

Alison Pavlovich and Dr David Sutton are lecturers with Massey University’s School of Accountancy

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