The government's Tax Working Group is encouraging submissions on capital gains taxes and land taxes, while stressing that owner-occupier housing is out of bounds.
In a statement accompanying the publication of a background paper for submissions, the group's chair, former finance minister Michael Cullen, said it was clear that a capital gains tax and land taxes will be "among the most contentious issues" the working group will deal with.
"I want to take this opportunity to remind New Zealanders that the family home is completely out of the mix but that still leaves plenty of scope to review other ways such taxes might be applied. Inheritance taxes are off the table too," Cullen said. "This is very much the discussion and consideration phase. No decisions have been made and there are no pre-conceived ideas about where this process will end up. Every idea will be examined on its merits.
"We're not being asked how to raise more revenue for the government but we are being asked how to maintain the current level in the face of some major future challenges such as an ageing population and new technologies."
The working group wants submitters to identify the most "significant inconsistencies" in the system in need of the most urgent attention. Submissions are open until April 30 and today's paper is intended to help respondents meet the review's terms of reference in coming up with a fairer and more balanced tax system. Chief among those is the exclusion of a capital or land tax on owner-occupier housing, typically referred to as the 'family home', despite the favourable tax treatment it enjoys.
"Over time it is likely that a focus on capital income taxation will be increasingly important in ensuring that the tax system is as fair and efficient as possible," the paper said. "The flexibility of the tax system is important for the future. At the same time certainty – the ability to signpost the desired direction of tax policy and avoid unexpected policy shocks – is also important."
Different tax treatments of different investments – in particular, the treatment of housing as compared with other investments, was an area of major concern, the paper said. "If our broad-based, low-rate system is working well, there should be only minor (or no) differences in the tax treatment of different forms of investment."
The paper identifies the treatment of household savings as an area of concern, particularly the advantage housing has, where the marginal tax rate for owner-occupied housing equity of 11.3 percent and rental housing equity of 29.4 percent compares to a marginal rate of 47.2 percent on portfolio investment entities (PIE), superannuation funds, and companies that don't pay dividends or make capital distributions, a 55 percent rate on foreign shares, and a 55.7 percent rate on bank accounts and companies that make distributions.
"Under a broad-based, low-rate system, ideally the (marginal rates) would line up perfectly and there would be no difference in marginal effective tax rates between the types of investments," the paper said. "Relative to other countries, New Zealand's marginal effective tax rates on savings are quite uniform, but there may be room for improvement to make our current system more consistent. Consistent treatment should improve both fairness and efficiency."
Similarly, the introduction of a land tax is restricted by the exclusion, which would "introduce a preference in favour of land used for owner-occupied housing over other uses (including rental housing unless land used for rental housing were also exempt)" and undermine the efficiency of a universal tax.
The group is expected to deliver an interim report by September and a final document by February next year, with the government using that to inform future tax policy ahead of the 2020 general election.
The country's ageing population is also seen as shifting the future tax mix away from labour income and into capital income from savings and investments and GST.
Among the considerations mooted in the paper are how the growth of the sharing economy, where people use online platforms to share assets, would see a greater amount of income would skirt reporting regimes, while blockchain technologies and cryptocurrencies bypassing traditional financial institutions also undermined tax administration.
On company tax, the working group paper said New Zealand's corporate rate of 28 percent is relatively high, while noting it's in the nation's best interests to set the rate based on its own circumstances and constraints, and wasn't "simply a matter of trying to have a tax rate that is lower than the rest of the world or our immediate neighbours."
Australian Prime Minister Malcolm Turnbull wants to cut company tax to 25 percent from 30 percent for firms with a turnover of more than A$50 million, despite opposition in the Senate, following a move by US President Donald Trump in reducing corporate taxes.