In addition to the widely anticipated capital gains tax, the Tax Working Group has also recommended a tax break for low and middle income earners.

The group proposes allowing people to earn more than they can at present at the bottom tax rate of 10.5 per cent, which currently tops out at $14,000 a year. It proposes three variations in which the 10.5 per cent tax band would apply up to $20,000, $22,500, and $30,000, although in the last case, it would recommend raising the second tax income band rate from 17.5 per cent to 21 per cent.

However, the group notes that all the proposals "are likely to have only a minor impact on income inequality as measured by the Gini coefficient".

"If the government wishes to improve incomes for very low-income households, the best means of doing so would be through welfare transfers. A material reduction in income inequality through the personal tax system would require broad income tax changes, including an increase in the top rate."

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Such proposals were outside the group's terms of reference.

The Tax Working Group also urged the government to make a broad extension to the capital gains tax regime.

Residential investment and rental property are seen as a no-brainer for inclusion in an expanded regime and the group recommends including shares, all types of land, intangible property, and all business assets.

The tax would apply at the whatever is the taxpayer's highest income tax rate and would not have allowance for inflation. Businesses would have five years to establish a starting valuation from which any future capital gains or losses would be calculated. The group estimates its full suite of changes would raise around $8 billion in their first five years.

It has removed its earlier suggestion that there should be an exemption from capital gains tax when a small business is sold, but it recommends against excluding personal assets such as boats, cars, artwork and other durable household assets. However, sale of the family bach would attract capital gains tax under the TWG proposals.

The family home and the land it sits on have always been ruled out of any change to the taxing of capital gains.

The government would now take "a measured response" to the TWG's proposals, and consult with its governing partners, New Zealand First and the Green Party, for final decisions in April.

"It is highly unlikely all recommendations will need to be implemented," the ministers said.

"It is the government's intention to pass any legislation to implement any policy changes arising from the report before the end of the parliamentary term", although the working group's chair, former Labour Finance Minister Michael Cullen, warned that meeting that timetable would be challenging.

He predicted that although the earliest any capital tax changes would come into effect was April 1, 2021, he said implementation in 2022 was more likely.

Cullen said the proposals would improve the fairness of the tax system since the top 20 per cent of households by income owned more assets combined than the remaining 80 per cent.

"Where there's capital income is where the bulk of the capital gains tax will lie," he said.

Modelling for the group suggests that the impact of capital gains tax on residential investment property would raise rents but reduce house prices, although the impacts would be small and easily "swamped" by other factors in the housing market, such as the impact of KiwiBuild.

- BusinessDesk