The IRD and the Treasury have released a Taxation of Savings and Investment Income report outlining potential tax reforms that could improve NZ’s economic performance. Although changes in the near future are unlikely, it is an interesting gauge of what changes could be made in the longer term. Some notable highlights have been summarised below.
Capital Gains Tax
Interestingly, the Treasury and the IRD are at odds regarding whether or not a capital gains tax should be implemented. The document states that the Treasury favours a capital gains tax, as it believes that this tax will raise revenue and at the same time increase efficiency. However, the IRD are of the view that the practical disadvantages resulting from implementing a capital gains tax regime will outweigh any benefits in the near future.
Capital Income Tax
Another proposed idea is a reduction in the tax rate that applies to income from capital. The reduced rate would apply to investments such as interest on bank deposits and investments into the PIE regime. The regime would also be relaxed to remove the requirement for an investment to be held in a managed fund.
Cutting tax on interest income (for NZ residents) is favoured as it is perceived to have the biggest impact on savings. But the concern is the distortions it may cause as a result of debt funding being more attractive than equity. Preference over debt is also seen as something that could chip away at financial stability.
Because of NZ’s relatively high level of foreign capital ownership, a reduction in the corporate tax rate is not recommended. It is acknowledged that New Zealand’s corporate tax rate needs to be in line with overseas jurisdictions to make sure New Zealand is in a position to compete globally. But dividends paid by companies to non-resident shareholders are typically not subject to
New Zealand’s top personal marginal rate of 33%, which normally applies when a dividend is paid to a NZ resident shareholder. This ultimately leads to a loss of tax revenue that would need to be funded by NZ resident taxpayers. In addition, reducing the corporate tax rate has the distortionary effect of incentivising taxpayers to shelter personal income in companies.
Personal Tax Rates
Amongst the various reforms discussed in the report, the one that seems to be most favoured to boost economic welfare is further cuts in personal income tax rates. Personal tax cuts are believed to boost GDP and increase national savings. A change to the rate would also be easy to implement.
The proposed reforms would no doubt come at a cost. The report recommends that given the current economic environment we are in, any reforms in this area should be presented in a ‘package’ similar to the 2010 Budget. Further work is required to confirm the consequences of the reforms before changes are recommended for implementation. Hence it is unlikely that any changes will be implemented in the near future. Nonetheless, the report provides a sense of what potential changes could be made in the future
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