Tax reform was a major plank of the National Party's election campaign. Below, we set out National's tax policies and also discuss other possible tax changes which National may implement during its term of office. National's KiwiSaver reforms are discussed in the KiwiSaver Alert issued earlier in this series.
Pre-election tax policies
Personal tax rates and independent earner rebatePersonal tax cuts were the key component of National's tax policy. National's proposed tax rates and thresholds for the next three years are as follows.
$0 - $14,000
$14,001 - $48,000
$48,001 - $70,000
$70,001 and over
$0 - $14,000
$14,001 - $48,000
$48,001 - $70,000
$70,001 and over
National had planned to provide greater tax cuts, but was required to reduce them to the above levels following publication of the Pre-election Economic and Fiscal Update. Accordingly, the Government can be expected to make further tax cuts after 2011 if economic conditions permit. National's stated medium-term goal is a three-tier tax system with a maximum personal rate of no more than 33% on income above $50,000.
National also proposes introducing a new independent earner rebate for persons who earn $24,000 or more and are not receiving any other benefit. The rebate is $10 a week for the 2009/10 income year, increasing to $15 week in the following tax year. Entitlement will abate as income increases above $44,000, with no benefit payable above $48,000 in the 2009/10 income year and above $50,000 in the following year.
National's announced tax cuts, in conjunction with its new rebate, are clearly designed to appeal mostly to middle income earners.
R&D tax credit
National has said it will repeal the current 15% research and development tax credit, with effect from the start of the next income year. The savings from this repeal, in conjunction with the KiwiSaver reductions, will be used to fund its tax cuts.
The removal of incentives for research and development is surprising from a party that likes to be seen as pro-business. While the existing R&D tax credit regime required some amendments, it was generally considered economically beneficial. We suspect its removal was necessitated by National's need to demonstrate that its undoubtedly more popular tax cut package could be funded without resort to specific cuts in government spending or increased borrowing.
Whether National will re-introduce some form of R&D tax benefit if economic conditions improve is an open question.
Future tax changes
Proposals in current tax bill
The first question is what effect the change of government will have on the proposals in the current tax bill – the Taxation (International Taxation, Life Insurance and Remedial Matters) Bill. This Bill contains substantial amendments to the tax law.
In particular, the Bill would:
- significantly, and in our view unjustifiably, widen the circumstances in which two persons will be treated as associated;
- reform the tax treatment of New Zealand resident investors in controlled foreign companies (CFCs). CFCs are foreign companies controlled by a small group of New Zealand residents. The new rules would:
- effectively limit the current grey list exemption to Australian companies
- only tax NZ corporate shareholders to the extent the CFC carries on a "passive" (i.e. investment) business
- exempt companies from tax on any dividends they receive from most CFCs
- repeal the current conduit tax relief rules, and
- introduce a thin capitalisation rule to deny New Zealand residents that invest in a CFC interest deductions on debt in excess of specified levels.
- reform the tax treatment of life insurers, by taxing the risk business on its actual profits in a similar manner to other businesses, and extending the benefits of the PIE tax regime to investors in life products.
The associated person amendments in particular have proven very controversial. A National Government may be more likely to respond to the business community's concerns and restrict the scope of the new rules than Labour would have been.
Similarly, there are a number of serious problems with the new CFC regime, due to the rather cautious approach of the legislation, which National may be more predisposed to remedy given that Labour introduced the Bill.
The other tax changes in the Bill are less controversial, and so remain likely to be enacted.
The direction of future tax changes
A number of further possible tax changes have been discussed by other parties and commentators. These include:
- reforming the imputation credit system. Possible reforms in this area include:
- allowing charities and people in loss to claim a cash refund for any imputation credits (this is currently being considered by the IRD)
- trans-Tasman recognition of imputation credits, so that Australian residents would get an Australian tax credit for New Zealand imputation credits and vice versa (this is currently being discussed by the New Zealand and Australian Government), and
- removing the imputation system altogether. Although this has been suggested, we doubt it will occur in the short-medium term.
- lowering the corporate tax rate. The National Government will form a coalition government with Act and United Future. Act's stated policy is to lower the corporate tax rate to 15% (in line with its proposed top personal tax rate) by the 2018/19 tax year. Act may be able to exert some political traction to ensure the rate is reduced from 30% at least. However, given the projected fiscal deficits, this would not seem likely in the short term.
- Extending the PIE regime, so it is attractive to offshore as well as domestic investors. This could be done by imposing no New Zealand tax on offshore income of a PIE to the extent that it has offshore investors.
- Removing the tax benefits of housing investment. Contrary to some reports, property investment is not taxed any more favourably than other investment types (and is in fact treated less favourably, as profits from property sales are taxable in a wider variety of circumstances than for other investment types). However the nature of property investment makes the availability of the usual tax benefits problematic. This is because:
- a much larger proportion of land's value can be borrowed, thus significantly increasing both the amount of deductions claimable and the tax free return on equity; and
- the tax benefits give people buying houses for investment purposes a significant advantage over those buying houses to live in, which is not an issue faced with other types of investment.
- One possible reform would be a return to the law which existed before 1985, where losses generated from property investment (e.g. where the interest cost exceeded the rental return) could only be offset against other income from property.
- Introducing a capital gains tax. The received wisdom is that the introduction of a capital gains tax would be political suicide for any government attempting it. However the introduction of a capital gains tax in conjunction with lower personal and corporate tax rates and an exemption for primary dwellings may not cause the feared uprising in the general electorate. It would also assist in removing some of the tax benefits from investment in the housing market (by making the profit clearly taxable). There has been no indication that any political party is considering such a move.
Some other tax changes which have been suggested by third parties, and which may be considered by the National-led Government, include:
- the elimination of provisional tax uplifts during the current economic crisis and increases in the income threshold at which provisional tax becomes payable
- accelerated depreciation deductions to encourage investment during the current economic climate
- expansion of tax deductibility for valid business expenses (e.g. the black hole expenditure which occurs on corporate equity raising), and
- reducing the punitive rates at which interest is payable on overdue tax and overpayments from the IRD.
Chapman Tripp will continue to monitor developments closely and will keep you informed as matters progress.