Sleeper clauses in a law passed last week could lay the basis for wealthy people ultimately paying more tax, according to tax experts.
That is despite the Taxation Principles Reporting Bill not specifically requiring anyone to pay a single cent extra.
This bill was passed under urgency in the last days of the current parliament before the election. It now awaits royal assent.
However, it might not survive the coming poll.
On the face of it, the new law simply requires the Commissioner of Inland Revenue to write an extra report, in addition to his department's standard annual report.
But what matters is what he puts in that report. The key phrase here is "economic income", which is repeated several times in the bill.
"The law uses the concept of economic income rather than taxable income, and that is not a concept that exists under the Income Tax Act," says a tax partner at Deloitte, Robyn Walker.
"This (change) would require some sort of assessment of what is the economic income of taxpayers in order to provide a general report across the whole tax system."
The passage of this law stemmed from the former Revenue Minister David Parker's belief that wealthy people were not paying their fair share of tax.
In support of that, he released a report in April showing over 300 wealthy families were getting 80% of their income from capital gains. But the way the law was structured meant they were paying a median effective tax rate of just 8.9%.
Parker announced his intention to bring in tax principles legislation in the wake of that report.
Influencing tax policy from beyond the political grave?
Parker subsequently resigned as Revenue Minister after Prime Minister Chris Hipkins ruled out capital gains and wealth taxes. But the passage of the Taxation Principles Reporting Bill would allow him to influence tax policy from beyond the political grave.
The exact meaning of the term "economic income" will have to be worked out by the Commissioner of Inland Revenue and his team. It would have to include realised capital gains. But it could also include unrealised capital gains, if the commissioner decides these improve a person's real economic status even before the money is actually cashed in.
Two other elements, so-called "horizontal equity" and "vertical equity", are important features of the new law.
"Horizontal equity is the extent to which people of similar levels of economic income pay similar amounts of tax," the law reads.
"In considering horizontal equity, the time value of money matters, and the tax system should generally recognise the economic effect of income."
The wording of the law goes on to give a strong hint that capital gain on investment income would be regarded as economic income by specifying just one exemption, the owner-occupied home.
The law then goes on to define vertical equity.
"Vertical equity is the extent to which the tax system is progressive," the law reads.
"Tax is progressive if wealthy people with higher levels of economic income pay a higher proportion of that income in tax.
"Wealthy people should pay no lower an average rate of tax relative to their economic income than middle New Zealanders."
The law has several other principles, such as efficiency, integrity and low compliance costs.
The Taxation Principles Reporting Bill incurred many controversies during its passage through parliament.
It was accused of being unnecessary because a cabinet minister can direct the Commissioner of Inland Revenue to write a report without legislation.
It was also charged with having a Henry VIII clause. This is a legal concept dating back to Tudor autocracy which allows a state bureaucrat to exercise far more power than was envisaged in the enabling legislation.
Although that was wound back a bit, the law still gives the commissioner huge leeway.
Clause 14 allows the commissioner to expand the list of measurements stipulated in the bill if he decides it is "appropriate" or is "within the direct responsibility of the Commissioner in relation to the tax system."
No-one thinks the Taxation Principles Reporting Bill on its own will make anyone actually pay more tax. But years of economic reports using the principles laid down in the law could create an intellectual climate which is sympathetic to reform.
It would gradually alter the IRD's methodology and lay the intellectual foundations for future changes.
Could Labour fall foul of its own legislation?
Meanwhile one tax expert speaking on condition of anonymity thinks the law will cause the Labour Party to fall foul of its own legislation on two of its flagship policies.
He thinks the proposed GST exemption on fruit and vegetable could fail the vertical equity principle, as well as the efficiency principle.
And the non-deductibility rule for interest on rental properties would fail the horizontal test, because it singles out one form of investment over others, even within the real estate industry.
"The Inland Revenue Department plays with a pretty straight bat and will have to call out the Government on these two," he predicts.
Robyn Walker meanwhile thinks there is some merit to the new law, even if reporting could have been achieved without special legislation.
"If there was more regular reporting on (the tax system), you would get a build up of history about how things are changing over time, and whether certain demographics are being taxed more.....for example how much GST different groups are paying.
"Reporting on that would help build up a more holistic picture."
Meanwhile the law was condemned by the National Party during debates as an attempt by Labour to "enshrine its own views on future governments".
National also said the law would grant "extensive and invasive" powers to the IRD. It could have "unintended and unforeseen consequences" and it vowed to repeal the legislation if elected.
The associate Minister of Revenue Deborah Russell meanwhile insists the law is mainly concerned with providing "consistent and transparent information.....on a factual basis."
She adds it does not mandate people to actually pay tax on their economic income. That would be for future governments to decide.
"It is important to remember that tax principles are not hard and fast rules. They can be balanced off against each other and different governments may prioritise some principles."
16 Comments
I'm happy for them to make headway. They can just pay tax like everyone else. Because that's FAIR. And ditto for religious outfits too. However, this Govt is not making laws favouring people of one religion over another. Imagine if they did. How would you feel if they announced that only Mormons would be entitled to better healthcare, free University education, given disaster relief money after a cyclone, or provided access to life saving drugs? Everyone else can go without. So long as race is what defines how you are treated in NZ, I'll be calling it out.
This is the next chapter in the special legislation sneaked through parliament to legalise IRD having the ability to compile, record, monitor and audit assets held by individuals in NZ. That legislation was camouflaged as only an enquiry into the assets of certain number of wealthy New Zealanders. But the legislation and power remains in place. This is in itself a direct contradiction and denial of the protection and rights afforded by a cornerstone of our law for over 800 years. That is the Magna Carta provisions of which were enshrined to exactly prevent the Crown from intervening in the legitimately owned assets of private citizens. Here Parker not only has denied all his legal training but defeated his duty to the point of being Orwellian. And here Orwell sums him and his motives up nicely, something like - it’s not so much that socialists love the poor, it’s their hatred of the rich that drives them.
A somewhat disappointing bill. I would have expected that a Taxation Principals Reporting Bill would have touched on, and considered the implications of:
Whether the distinction between unearned income such as, interest, rent, or capital gain, and income from actual production or from the provision of services, has relevance for tax purposes; and
Whether the distinction between income from ownership of assets on the one hand, and business revenue on the other, has any relevance when it comes to the allocation of expenses. It should be noted that while a business may own assets, and therefore be able to deduct an appropriate amount of depreciation in respect of those assets, ownership of the business lies with the proprietor, landlord, or shareholder.
Of course it's important that the wealthy should pay more tax, but I think that this is not the only consideration appropriate to a discussion of the "principals of taxation". In other words the Commissioner should also be considering the sort of questions posed above. He probably won't feel any obligation to do so if the Act is as described in the above posting.
The administration bureaucracy entailed in managing major asset registers, as well as the cost imposed on taxpayers to create them, look mind-bogglingly complex and expensive. And do you really want governments deciding how much things are worth? Look at the mess that is property valuation, and what about large ticket items that lose money?
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