Thomas Pippos. Photo / Sylvie Whinray
In terms of tax settings, the Government would largely welcome the results of the Herald’s 2024 Mood of the Boardroom survey.
Respondents were generally comfortable with what has occurred and what has been foreshadowed. This is a markedly different outcome to the results of the same survey last year where respondents evaluated the previous Government’s performance poorly.
At one level, none of this should come as a surprise, as the previous Government’s policies lost favour with respondents and, subsequently, with voters. No doubt tainted by the then worsening fiscal and social outcomes, there was a lack of confidence that continuing with the status quo would yield positive outcomes.
Likely also influencing the current results is that the Government is still benefiting from being in a grace period since the last election, with an Opposition that has deliberately not provided an alternative view to challenge the path being adopted outside of soundbites. In part, this is because it’s too early in an election cycle to declare your hand.
The change of sentiment is stark when you consider that 67% of respondents feel that the Government’s priority (and resultant actions) to return to Budget surplus is about right (juxtaposing 80% of respondents last year that were unhappy with the previous Government’s approach). Similarly stark is the fact that only 16% of respondents have a heightened level of concern around the efficacy of Government spending this year, with that number peaking at 85% last year (under the previous Government), with one respondent last year stating that “it was out of control”. A similar sentiment this year being “the previous Government’s economic credibility has taken a significant hit as a consequence of ineffective Government spending”.
Positive also for the Government is that 85% of respondents feel that the Government’s actions to reduce inflation are about right.
Working down the popularity stack, many of the Government’s tax policy settings or inherited settings are broadly speaking seen as reasonable, from arguably a friendly crowd, but without any emphatic support. They include increasing certain personal tax brackets for inflation, increasing the In Work Tax Credit, removing the residential interest deductibility rules, introducing a new Family Boast Childcare payment, extending the Independent Earners credit and or even retaining the 39% tax rate on personal income.
In terms of the 39% tax rate, the sentiment seems to be one of acceptance having regard to the current context rather than acceptance per se. When asked in a wealth tax context, only 4% of respondents were supportive of any increase in this area. As one respondent said: “I would like to see the tax rate back to 33%, but now is not the time.”
The taxation of capital gains still polarises respondents with a statistically signification number seemingly open to it if it’s on a realisation basis, as 4.5% of respondents are either unsupportive or only somewhat supportive of the reduction in the bright-line test from 10 years to two years. That level increases to 59% who are either unsupportive or only somewhat supportive of not introducing any form of Capital Gains Tax. Related, 41% of respondents were open to a realised capital gains tax to help address wealth inequality. Two quite direct comments from respondents included: “We can’t leave a capital gains tax conversation to the next generation” and “Get on with a capital gains tax - surely there can be a bipartisan agreement on this”.
That as it may, the current Government has strongly signalled that the taxation of capital gains is not on its agenda. Something that would be hard to move away from given the Coalition members in the Government, but likely only something a National-led Government can ever move on.
Wealth tax unsurprisingly continues to be unpopular.
Last year 90% of respondents looked unfavourably at the wealth tax policies offered by the Green Party and Te Pati Maori. A sentiment that appears to continue this year with only 11% of respondents seeing wealth tax as a solution to wealth inequality vis a vis the 67% that feel ensuring suitable minimum levels of welfare and income (a heightened safety net) is the main response to the problem.
Linking the discussion back to housing, one responded stated: “The problem is not wealth inequality - it is more ‘housing affordability’ for aspiring homeowners. That is the ‘problem’ that needs solving. Our true inequality problem stems from the state’s failures in relation to education, housing, and healthcare policies — not income or wealth disparities. Focusing on wealth redistribution won’t solve New Zealand’s disparities.”
The above provides some well-trodden ground for the Opposition to differentiate itself on tax, accepting that in the near to medium term, this is likely to just be through soundbites.
When the taxation of capital has been fought and lost by Labour four times since 2011 (if you include the policy retreat in 2023 that caused David Parker to step down as the Minister of Revenue), it’s not intuitive that they would go for a fifth, either alone or with others, and even harder if it’s with a leader connected with the past. Even less intuitive is that Labour would lead with a Wealth Tax or include that in any policy package when they haven’t been able to get the taxation of capital gains over the line.
As the saying goes, attributed to Albert Einstein, “insanity is doing the same thing over and over again and expecting different results”; or as aptly put by legendary investor Sir John Templeton, “the four most dangerous words in investing are - this time it’s different”.
But it’s not all plain sailing for the Government. The call to continue to reduce the corporate tax rate remains pronounced with 63% of respondents concerned around our competitiveness in this area and 67% looking for New Zealand to match Australia’s 25% rate by 2027.
Similarly, 77% of respondents remain concerned about our ability to successfully compete in attracting capital and labour, including around our tax settings. With this amount rising to 85% of those supportive of developing more permanent rules to attract and retain high net worth individuals in New Zealand who otherwise face challenges with their pre-existing investment structures integrating into the domestic tax rules.
There is certainly an aspect of Groundhog Day watching the political tax protagonists start to play.
Whether we are lying within the eye of a tax policy storm that will become clearer with the 2026 election is somewhat moot. But there is always a reasonable likelihood that tax policy will once again become a political football with possibly poor policy outcomes. This could be exacerbated given fiscal constraints and if tax policy is sought to be justified through soundbites.
The taxation of trusts at 39% and the removal of tax depreciation of buildings are two examples on point.
The nature of the topic is also one that garners passionately held views at diametrically opposite ends of the spectrum, even before factoring in the political realities of any substantive change.
Again, from a likely friendly crowd, the survey suggests the Government’s tax policies are reasonable, but without any real emphatic support.
From the Opposition, their powder remains largely dry, but with a Finance Spokesperson who should have the subject matter expertise to light it — but not in 2024 and probably also not in 2025.
New Zealand’s existing tax regime stands in the way of high-net-worth individuals looking to move or return to live here.
Transitional residency rules attempt to address this problem by giving individuals a four-year window before paying the full tax.
Yet with a number of people now approaching the deadline and an increased interest in people moving here, it could be a good time for tax officials to develop a more permanent solution to the issue.
Business leaders remain concerned about the impact of tax rules on high-net-worth individuals with 56.8% of respondents to the Herald’s CEO Survey saying they have the same level of concern as in the past and 28.4% reporting heightened concern. Among the most problematic matters affecting incoming talent are the Foreign Investment Fund (FIF) rules. The rules assume anyone holding overseas assets is earning an income from them.
That was a reasonable assumption when the rules were established 40 years ago as a way of tackling the flight of wealth into overseas tax havens beyond IRD’s reach. The designers did not anticipate a time when talented Kiwis working overseas would receive some or all of their remuneration in the form of equity that could not immediately be turned into cash. It also affects any would-be immigrants who may have earned wealth that way.
FIF rules assume overseas assets are earning income at a rate of 5% per year. With the top rate of income tax sitting at 39%, this in effect amounts to a wealth tax of 2%. In many cases, the assets are held in the US, where they are taxed when they are realised. New Zealand’s double tax agreement with the US does not cover these circumstances, which means FIF often ends up as a form of double taxation. “This is a major deterrent to the introduction of new capital and personal networks to NZ that must be addressed with urgency,” says a director with wide offshore experience.
Time to cut the corporate rate?
Companies in New Zealand are taxed 28% on income. This is at the high end of the range for OECD countries; the 8th highest headline rate. With other countries looking to reduce corporate tax rates in the future, almost two-thirds (63%) of our business leaders think the existing rate is too high or not competitive enough to attract foreign investment.
Foodstuffs North Island CEO Chris Quin says: “We need to keep an eye on what other countries competing for investment and skilled workers are doing and make sure we aren’t an outlier because that will work against us. New Zealand has many advantages: relative economic and political stability, access to Asia-Pacific markets, great quality of life, but also downsides: geographical isolation, small market size, high regulatory and compliance costs so taxation will be a key factor.”
A leading chair says the competition for capital is real: “This must be watched”. NZ Windfarms’ chair Craig Stobo suggests we look at Singapore, which has a headline corporate tax rate of 17%.
More than two-thirds of respondents want government to reduce the headline rate of corporate tax to 25% by 2027 to match Australian rates while one in five (20%) disagree.
An independent director who is against dropping rates, says: “Australia faces other costs like huge employee superannuation contributions that NZ companies don’t face”.
Economist Cameron Bagrie favours matching the Australian corporate rate, but cautions the lost income will need to be balanced by other revenue streams.
Deloitte is a sponsor of the Herald’s Mood of the Boardroom project.
Many business leaders rate the Opposition Finance Spokesperson highly.