The underpinnings of the $45 billion KiwiSaver regime would almost certainly be scrutinised by the just-announced Tax Working Group (TWG), according to its chair, Sir Michael Cullen.
Cullen, who as the last Labour Finance Minister introduced KiwiSaver in 2007, said both the portfolio investment entity (PIE) and fair dividend rate (FDR) tax rules designed to support the savings regime would fall under the TWG ambit.
“I can’t see any reason why they wouldn’t,” he said. “It’s fair to assume that anything not specifically excluded in the terms of reference will be covered in the review. I’m not coming into this with any pre-judgment.”
Both the PIE and FDR rules would likely be caught in any discussion around a general capital gains tax (CGT), Cullen said.
While a broad-based CGT was not specifically mentioned (although a house-centric one was) in the TWG terms of reference released last week by current Finance Minister, Labour’s Grant Robertson, the government set as one of the review’s six objectives to map out: “A system that treats all income and assets in a fair, balanced and efficient manner, having special regard to housing affordability.”
The housing discussion may swamp the “all income and assets” imperative but Cullen said the impact of any recommended changes would have to be considered in light of the entire investment tax rules.
“[PIE and FDR] will probably not be the prime focus of the TWG but there could be a potential big impact [if major changes are recommended],” he said.
The current rules exempt PIE funds from paying CGT on most NZ and ASX-listed shares – an avenue also open to locally-domiciled individual investors as long as they ‘intend’ to hold those equities for income rather than capital growth. As well, the system offers something of an incentive to investors on the highest marginal tax rate of 33 per cent with the top PIE tax impost set at 28 per cent.
PIE funds are also required to pay tax on offshore equities under a deemed annual gain of 5 per cent of the asset base as per FDR rules.
FDR is part of the Foreign Investment Fund (FIF) regime that gives individuals the option to treat tax on offshore equity investments based on actual gains or losses.
Cullen said while the FDR rules had a few quirks they were a “pragmatic answer to dealing with the complex question of how to tax offshore investment vehicles”.
He said the yet-to-be-named other TWG members would undoubtedly bring a “range of views” to the table.
“I don’t know who will be on it yet. I don’t even know how big it will be, but I hope it’s not too big,” Cullen said. “There is a list of potential members [circulated by] Treasury and IRD, and I will have some influence on appointments but ultimately it will be up to the Minister.”
In particular, the government has asked the TWG to report back on the following points by February 2019:
- Whether the tax system operates fairly in relation to taxpayers, income, assets and wealth
- Whether the tax system promotes the right balance between supporting the productive economy and the speculative economy
- Whether there are changes to the tax system which would make it more fair, balanced and efficient, and
- Whether there are other changes which would support the integrity of the income tax system, having regard to the interaction of the systems for taxing companies, trusts, and individuals.
Meanwhile, the terms of reference name a handful of taboo topics for the TWG including: increasing the GST rate; an inheritance tax; the family home; the personal tax transfer rules; the base erosion and profit shifting (BEPS) global tax reforms; and, the current Inland Revenue Department ‘business transformation’ program.
Cullen said any major reforms coming out of the TWG would not be enacted until after the 2020 election “but some [potential recommendations] may be able to be implemented under the current framework”.
“For example, if we decide to abolish the PIE regime that would fall under the definition of a major change,” he said.