Tax working group review and your business

Kirsten Hawke

There is plenty of coverage about the impact of the recommended capital gains tax on investments but few commentators have discussed the impact of the entire tax review on businesses.

Tax working group review and your business

The tax working group has only made recommendations and now it is the Government’s task to determine what, if any, of the recommendations they implement.

Don’t lose sleep yet over the much-publicised capital gains tax (CGT) reforms.

Capital gains tax and depreciation recommendations for businesses

Currently, New Zealand has no CGT, so you are not taxed on profits you make selling a business.

If you have depreciated assets and tax claims were made, currently, the business is taxed if the asset is sold for more than its depreciated value.

For example, a piece of manufacturing equipment or a vehicle that has a market value that is higher than its book value.

In 2010, the depreciation rate of buildings with long estimated useful lives was changed to 0 per cent and the 2018 tax working group assessed the merits of restoring the deductions.

“Subject to fiscal constraints, the Government could consider restoring depreciation deductions if capital gains taxation is extended.”

Tax is never straight forward and the majority of the working group reviewing New Zealand’s taxation recognised “extending the taxation of capital gains would involve an increase in compliance and efficiency costs.”

This will impact on businesses, but the group felt the overall goal to create a fairer tax system and reduce investment biases outweighed these costs.

The review recognised there is a spectrum within the recommended tax reform, with a clear case to include residential rental properties in CGT, where as the case to include corporate groups, unlisted shares and business goodwill, is more complex.

Who has CGT?

In 2015, nine of the 28 OECD nations did not have CGT – New Zealand being one of them.

CGT is common in developed countries, with Denmark reported to have the highest rate of 42 per cent in 2015.

Australia ranks 16th with a rate of 24.5 per cent.

Top Marginal Tax Rate on Capital Gains, by OECD Country, 2015

Denmark

42.0%

France

34.4%

Finland

33.0%

Ireland

33.0%

Sweden

30.0%

United States

28.6%

Portugal

28.0%

United Kingdom

28.0%

 

Environmental impact and ecological outcomes

The tax working group reviewed the feasibility of an environmental tax to be applied to businesses.

“There is significant scope for the tax system to play a greater role in sustaining and enhancing New Zealand’s natural capital.”

The group recommended the Government’s policymakers prioritising uses a tax system to “expand the coverage and rate of the Waste Disposal Levy, strengthen the Emissions Trading Scheme and advance the use of congestion charging.”

If your business has negative environmental impacts, taxation could be used to modify your practices however the group recognises this taxation is more beneficial when there is:

·         High behavioural responsiveness

·         A diversity of responses available

·         Significant revenue-raising potential

In plain language – if businesses have better environmental options and the tax brings in enough funds – it will have more chance of creating the desired impact.

Business and productivity taxation

There are no big changes recommended for New Zealand’s current approach to taxation of business and they did not recommend any reductions to company tax.

Productivity, innovative start-ups and research and development (R&D) could experience a tax break.

Several recommendations, including changes to the loss continuity rules, expanding deductions for black-hole expenditure and concessions for nationally significant infrastructure projects.

Many public submissions to the tax working group focused on “the treatment of multinationals and digital firms”.

The Government is currently working with the OECD on the direction of international taxation and the tax working group recommends this continues.

Did someone say “sheep”? Essentially, we will watch other countries and do the same on the tricky international tax laws.

Timeline

The Government has stated it will not announce a full response to the recommendations until April 2019.

And, Labour says the outcomes – if any – will not take effect until the 2021 tax year.

The tax working group recognised the “timeframes for implementing tax reform will be challenging. The Government will need to ensure additional resources are available for implementation if these timeframes are to be achieved.”

There will some busy tax legislators and accountants getting up to speed on any changes in the next few years.

For an in-depth read go to the Future of Tax recommendations.

Kirsten Hawke