Retirement savings concessions, a rethink of the capital gains tax (CGT) relief on most NZ and Australian shares within portfolio investment entities (PIE) and changes to the fair dividend regime (FDR) will all be up for discussion under the Sir Michael Cullen-headed tax reform consultation.
Cullen said a broad-based CGT (excluding the family home) – one of the specific Tax Working Group (TWG) agenda items – would inevitably spill over to the current capital gains exemptions on most NZ and Australian shares held in PIEs.
The PIE carve-out of CGT for NZ and most ASX-listed shares (not necessarily available to direct investors) operates as a significant de facto incentive for funds investing in local equities, including KiwiSaver schemes.
According to Cullen (who as the-then Finance Minister introduced the PIE and KiwiSaver regimes in 2007), any proposal to introduce a broad-based CGT would have to take account of flow-on effects to KiwiSaver and PIE investors.
“There are lots of inter-linked bits [in the PIE rules],” he said. “If you change one part it will affect all the others.”
However, Cullen said under current settings only high income-earners currently benefit from the PIE concession that sets a top tax rate of 28 per cent (compared to the 33 per cent maximum income tax rate).
In its discussion paper released last week, the TWG says under an equitable regime for investors “there would be no difference in marginal effective tax rates between the types of investments”.
“Relative to other countries, New Zealand’s marginal effective tax rates on savings are quite uniform, but there may be room for improvement to make our current system more consistent,” the TWG paper says. “Consistent treatment should improve both fairness and efficiency.”
The TWG analysis shows bank account deposits and distributed company earnings garner the highest effective marginal tax on savings of 55.7 per cent followed by offshore equities under FDR (55 per cent). Superannuation funds, PIEs and non-distributing companies face an effective marginal tax impost of 47.2 per cent, the paper says, while equity in rental property (29.4 per cent) and the family home (11.3 per cent) were the most lightly-taxed saving vehicles.
Cullen said the problematic FDR rules – that levy a tax on offshore equities based on the year-end market value of 5 per cent of total assets – would be considered by the TWG.
But as the man responsible for introducing FDR, Cullen said he may recuse himself from much of that debate.
“[FDR] was a compromise solution that attempted the best estimate of income [from offshore equities],” he said.
The TWG paper also earmarks the NZ retirement income system – which taxes savers on the way through but exempts final draw-down payments (known as tax-tax-exempt – or TTE) – for review.
“New Zealand’s approach to the taxation of retirement savings is also distinct,” the discussion document says. “The tax system does not offer large concessions for retirement savings; retirement savings contributions are taxed when they are made and as investment income is earned, rather than when the savings are drawn down in retirement.”
Cullen said changing from a TTE system to one that exempted investment returns and/or contributions would come with a large bill for government.
The TWG paper says: “If New Zealand were to switch to a system where income earned on the [retirement savings] investment was not taxed, the fiscal cost would be significant.”
Aside from a broad-based CGT and potential retirement savings incentives, the TWG would consider a number of proposals covering GST tweaks, charitable exemptions as well as wealth, land and environmental taxes.
Cullen said growing fiscal pressure and intergenerational equity issues would ultimately require taxes to weight towards capital rather than labour.
Submissions to the first round of TWG consulting are due by the end of April with the final recommendations slated for February next year.
The group would discuss how to publish submissions, among other matters, at the next of its fortnightly meetings this Friday, Cullen said.