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You are here: Home / Investment News / KiwiSaver, PIEs last in line for tax enquiry; inflation-indexing floated

KiwiSaver, PIEs last in line for tax enquiry; inflation-indexing floated

July 8, 2018

Sir Michael Cullen: Tax Working Group chair

The Tax Working Group (TWG) would likely consider the impact of any proposals on the NZ investment regime as one of the last agenda items.

TWG chair, Sir Michael Cullen, said any review of the potential effect of any tax changes on the current NZ investment regime – including KiwiSaver – was some time away.

“We may not be ready [to publish analysis of KiwiSaver etc] until quite close to the report,” Cullen said.

The TWG is due to publish an interim report by September this year before issuing final recommendations next February. If, as widely expected, the TWG opts for a broad-based capital gains tax (CGT) there would be significant consequences for the existing NZ investment tax settings.

For example, under the current regime most NZ and Australian shares are CGT-free for portfolio investment entities (PIEs) including KiwiSaver schemes. A CGT would also shake-up the fair dividend regime (FDR), which taxes offshore equities on a deemed annual return of 5 per cent.

Cullen said the TWG would release papers on CGT and “capital income” taxes “in the near future”. However, the latest tranche of TWG reports published last week – covering business tax – do touch on CGT issues.

The TWG background paper on ‘effective company tax rates in NZ’ estimates that its sample of small-to-medium enterprises racked up untaxed realised capital gains of $2.2 billion in the 2015/16 financial year.

Furthermore, the paper highlights ‘financial and insurance services’ as one of the major beneficiaries of a CGT-less environment with annual tax-free gains of $217 million (bested by agriculture, at $412 million, and ‘rental, hiring and real estate services’ with $763 million).

Financial services also ranked as one of the four industries that “stand out as having high proportions of untaxed realised gains when compared with the accounting profits of the industry”.

“These results indicate that untaxed capital gains play a significant part in the effective tax rate results. Realised and unrealised capital gains make up the largest recorded adjustments that reduce taxable income relative to accounting profits and appear in a number of industries that appear to have lower effective company tax rates,” the paper says. “The Group will consider the taxation of capital gains in future sessions.”

Elsewhere, the TWG considered four options to recalibrate the system if its recommendations lead to higher tax revenue. The four “revenue neutral” proposals cover:

  • re-introducing deductions for building depreciation;
  • greater latitude for businesses to carry forward losses;
  • the ability to claim ‘black hole’ expenditure; and,
  • inflation-indexing the entire tax base.

Of those four proposals, inflation-indexing would have the most significant effect on “more than just business income tax”, the TWG paper says.

“While these would be significant changes, under the current, relatively neutral system, not adjusting the tax base for inflation is probably one of the biggest distortions. This may seem surprising when inflation is so low, but an important corollary of current low inflation seems to be current low risk-free returns,” the paper says. “As such, the proportion of nominal risk-free returns that are attributable to inflation is material.”

However, the Treasury advisory paper notes that shifting to an inflation-indexed tax system would have “material compliance and administration costs” requiring a raft of changes such as:

  • excluding the inflation component of interest from tax;
  • removing inflation from interest tax deductions;
  • allowing “inflationary uplift” when calculating asset depreciation; and,
  • adjusting inventory cost prices for inflation.

The Treasury report says only a handful of countries have introduced inflation-indexed tax systems – and only during high inflationary periods – “due to the additional complexity” of compliance.

“More information on the impact of inflation in the tax system will be provided at a later meeting,” the paper says.

Cullen said the TWG had “narrowed some things down but we haven’t made any definitive decisions”.

Overall, he said the TWG review suggests that while the “current system isn’t broken” there were still a number of issues that could be addressed under new policies.

“We’re looking at various options that might move one way or the other,” he said.

Forming the TWG was on the Labour Party 2017 election agenda with a promise not to introduce any recommended tax reforms in this term of office.

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