The final Tax Working Group (TWG) report should be with the government well ahead of the late February deadline, chair Sir Michael Cullen has confirmed.
Cullen said the TWG has wrapped up its meetings with the final report expected to be handed to Finance Minister Grant Robertson within “a couple of weeks”.
“Whether the government publishes it then is up to them,” he said – naturally, without revealing what they are.
The TWG report – widely-expected to recommend a more broadly-based capital gains tax (CGT) – will also clarify how KiwiSaver and portfolio investment entities (PIEs) should be treated under the proposed regime, Cullen said.
“We do set forth some recommendations [on KiwiSaver and PIEs] in the final report,” he said.
The potential effects of a CGT on KiwiSaver and PIE funds emerged as one of the more complicated issues in the group’s interim report published last September.
For example, most Australasian shares are CGT-free when held in PIEs (including KiwiSaver funds) while offshore equities are taxed on a deemed annual return of 5 per cent under the fair dividend rate (FDR) rules.
The interim TWG report lays out four possible approaches to bringing PIE-held Australasian shares under a CGT, namely:
- taxing individual PIE members on either realised gains or accrued gains;
- treating CGT as a fund expense – a move the TWG “does not see… as a promising option”;
- bringing Australasian shares under a FDR regime as used now for global equities; or,
- keeping the status quo.
Of the four options, taxing Australasian equities as per FDR could be the most likely compromise.
“This would be administratively workable, just as the FDR regime is workable,” the interim TWG report notes. “However, for New Zealand shares it would need to be integrated with the imputation system and would again create a significant distinction between direct and managed investment (assuming direct investment in Australasian shares is not taxed on an FDR basis).”
The TWG September report also flags the possibility of lowering the deemed 5 per cent return given the “fall in risk-free rates of return since FDR was introduced in 2007”.
In the current low-interest era the 5 per cent FDR rate “could now be too high, even in the context of a system which ordinarily taxes both gain on sale and dividends”.
Regardless, the interim TWG report acknowledges that “imposing a realised capital gains tax on such assets held by MRPIEs [multi-rate PIEs], while retaining the benefits of the MRPIE tax regime, would require significant systems changes, amongst other practical issues”.
Likewise, if it makes the final cut, the earlier TWG recommendation to create lower tax rates for KiwiSaver funds compared to other PIEs could meet industry resistance on pragmatic grounds.
Another TWG proposal to remove the employer superannuation contributions tax (ESCT) only for KiwiSaver members earning under $48,000 per year would also skew the retirement savings playing field – and keep the IT consultants busy.
Cullen said a CGT would “absolutely introduce complexity” into NZ’s relatively simple tax universe.
“The report makes clear that [introducing a CGT] involves a trade-off between complexity and the amount of revenue it might raise,” he said. “The government will have to think hard and seriously about any changes.”
Whether the government ultimately follows through on any TWG recommendations, of course, will be determined by the political games in the months and years ahead.
But the TWG process, begun in September 2017 after the surprise Labour election victory, will end this month with a two-part final report – “not much longer” than the almost 200-page interim version, Cullen said – destined to top the summer must-read lists (non-fiction, bureaucracy category).