What Tax Working Group said: CGT best way to broaden, but too complicated; Most support land tax; Don't give GST exemptions; Top personal rate should match trust rate

With Labour about to announce a tax policy including a form of capital gains tax on Thursday (tomorrow) at 3pm, while National argues it has done enough to reorganise the tax system, it's probably time to remind ourselves just what the government's Tax Working Group actually recommended last year.

But first, Labour will also be announcing it will introduce a higher top personal income tax rate, for incomes "well into six figures." 

It is also expected to say it will take GST off fresh fruit and vegetables if it leads a government after the November 26 election.

As you can see, the TWG recommended the top personal tax rate should be aligned with the company, trust and top PIE tax rates to help stop tax avoidance. However, its members didn't mind if the company rate was lowered by more in order to make New Zealand more competitive. National did this.

National also raised GST to allow for cuts in income tax rates, something the group recommended.

On capital gains tax, the TWG argued a comprehensive CGT was the best way to broaden New Zealand's tax system. However, most members expressed concern that this would be complicated. National did not introduce a comprehensive capital gains tax, saying it would be too complicated.

Due to the complexity of a capital gains tax, most members of the Tax Working Group therefore favoured a low-rate land tax for funding other tax rate reductions. National did not introduce a land tax, and Labour will not look at it either.

There should be no exemptions for GST, the group said. National did not give any.

National instigated a review of the welfare system, as recommended by the Tax Working Group.

Finally, National implemented the recommendations in point nine below, which the group said should be implemented quickly.

See the Tax Working Group's final report here.

The Labour Party will announce its tax policy at 3pm on Thursday, after an hour-long lock-up for journalists in Wellington, which interest.co.nz will attend.

So for the record (again), here's the Tax Working Group's headline recommendations from its January 2010 report to the government:

Recommendations:

The TWG believes the problems with the current tax system are such that it requires significant change. The structure of the tax system needs to be significantly improved by making changes that involve a combination of changes to the tax bases and tax mix, to tax rates, and by improving some of the supporting tax rules. The main recommendations of the Group are:

1  The company, top personal and trust tax rates should be aligned to improve the system’s integrity. If at any time this is no longer feasible due, for example, to global pressure causing the company rate to reduce, at the very least the trustee rate, top personal tax rate and top rate for portfolio investment entities (PIEs) and other widely-held savings vehicles need to be aligned, accompanied by the introduction of suitable fiscal integrity measures.

2  New Zealand’s company tax rate needs to be competitive with other countries’ company tax rates, particularly that in Australia. Balancing this factor against the integrity benefits of a fully aligned system will guide choices between an aligned and non-aligned system.

3  The imputation system should be retained. However, this may need to be reviewed if Australia decides to move away from its imputation system.

4  The top personal tax rates of 38% and 33% should be reduced as part of an alignment strategy and to better position the tax system for growth. Where possible, the Group would like to see a reduction in personal tax rates across-the-board to ensure lower rates of tax on labour more generally. This could be achieved as part of a package to compensate for any increase in GST.

5  Base-broadening is required to address some of the existing biases in the tax system and to improve its efficiency and sustainability. Base-broadening is also required if there are to be reductions in corporate and personal tax rates while maintaining tax revenue levels.

6  The most comprehensive option for base-broadening with respect to the taxation of capital is to introduce a comprehensive capital gains tax (CGT). While some view this as a viable option for base-broadening, most members of the TWG have significant concerns over the practical challenges arising from a comprehensive CGT and the potential distortions and other efficiency implications that may arise from a partial CGT.

7  The other approach to base broadening is to identify gaps in the current system where income, in the broadest sense, is being derived and systematically under-taxed (such as returns from residential rental properties) and apply a more targeted approach. The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk-free rate.

8  Most members of the TWG support the introduction of a low-rate land tax as a means of funding other tax rate reductions.

9  The following targeted options for base-broadening should be considered for introduction relatively quickly:

• Removing the 20% depreciation loading on new plant and equipment.
• Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value.
• Changing the thin capitalisation rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.

10  GST should continue to apply broadly. There should be no exemptions.

11  Most members of the Group consider that increasing the GST rate to 15% would have merit on efficiency grounds because it would result in reducing the taxation bias against saving and investment. However, any increase in the GST rate would need to be accompanied by compensation to those on lower incomes. This would significantly reduce the net revenue raised from a higher GST.

12  There should be a comprehensive review of welfare policy and how it interacts with the tax system, with an objective being to reduce high effective marginal tax rates.

13  Government should introduce institutional arrangements to ensure there is a stronger focus on achieving and sustaining efficiency, fairness, coherence and integrity of the tax system when tax changes are proposed.