Tax Working Group responds to KiwiSaver claims

Source: New Zealand Government – Tax Working Group

In responding to a National Party claim that extending capital gains taxation as recommended by the Tax Working Group would mean that “the average person’s KiwiSaver” would be worse off, Tax Working Group Chair, Sir Michael Cullen said that the analysis failed to take into account the important TWG recommendations which would actually reduce tax on most KiwiSaver accounts.

“The Tax Working Group gave careful consideration to the impact that its proposals would have on KiwiSavers. Therefore, as complementary measures to an extension of capital gains taxation, the Group made four KiwiSaver recommendations (See recommendation 43 of the Group’s Final Report):

  • Reducing the lower portfolio investment entity (PIE) rates for KiwiSaver funds (10.5% and 17.5%) by 5 percentage points each.
  • Refunding the employer’s superannuation contribution tax (ESCT) on employer contributions for a KiwiSaver member earning up to $48,000 per year, with a phase-out of the rebate for savers earning over $48,000. KiwiSaver members earning less than $70,000 would receive a partial refund of the ESCT to their KiwiSaver balance.
  • Ensuring that a KiwiSaver member on parental leave would receive the maximum member tax credit regardless of their level of contributions.
  • Increasing the member tax credit from $0.50 per dollar to $0.75 per dollar of contribution (increasing the maximum annual benefit from $521 to $718.50).

“Three of these measures (reducing the lower PIE rates, refunding ESCT[1], and the parental leave initiative) were included in all four of the Group’s revenue neutral tax packages in Chapter 8 of the Final Report. These measures would ensure that, as a group, people earning less than $70,000 per year would have improved KiwiSaver outcomes if the Government adopted the Group’s recommendations for extending capital gains taxation (see table 8.3 of the Final Report for the tax cost/benefit for KiwiSavers from the different illustrative packages).

“If all of the TWG’s proposed KiwiSaver measures are adopted (as per Package 3 of the Group), then KiwiSaver members earning over $70,000 would also, as a group, be better off.

“While some individual KiwiSavers might not be fully compensated by the Group’s measures, for the most part, KiwiSavers would most definitely be better off.

“It’s good to have this national debate on tax and how we could be affected by the recommendations, but the debate should be based on full consideration of the facts”, says Sir Michael.


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[1] Some of the packages target the ESCT refunds to only those earning less than $48,000 per year.


The impact of the Tax Working Group recommendations on farmers

Source: New Zealand Government – Tax Working Group

Sir Michael Cullen, Chair of the Tax Working Group (TWG) has responded to a request to comment on recent claims about the effect on farmers of the Group’s recommendations regarding environmental taxes and extending the taxation of capital gains.

“The TWG’s Final Report provides a framework for using environmental taxes, and identifies scope for further development of tax instruments as a tool for addressing some of our most significant environmental challenges. It does not, however, recommend immediate adoption of specific environmental tax instruments. Nor does it make recommendations about specific levels for any environmental taxes, other than to note that the Emissions Trading Scheme (ETS) has under-priced the cost of greenhouse gas emissions.

“In several areas, we highlight issues that would need to be addressed before introducing environmental tax instruments – for example, addressing Maori rights and interests in water abstraction and water pollution. On the taxation of fertiliser specifically, we recommended that it only be introduced if significant progress is not made in the near term on implementing output-based tax instruments or other regulatory measures.

“The TWG also recommends some or all of environmental tax revenue should be used to help fund a transition to a more sustainable economy – for example, by helping farms transition to lower-impact operations. Analysis of the net impact of any environmental tax changes should take this revenue recycling into account.

“Concerning capital gains, the TWG has recommended extending the taxation of capital gains to cover a broader set of assets, including rural property, with tax generally being paid when an asset is sold or transferred. However, it’s important to note that this would only apply to capital gains made after the implementation date which the Government has indicated would be after the next election. Capital gains made before the implementation date would not be taxed.

“The TWG has also recommended that tax would not have to be paid when an asset is transferred or sold in some circumstances, and would instead be deferred until a later sale. These circumstances include death, relationship separation, and reinvestment for businesses with turnover of less than $5 million. For example, if a farmer dies and the property is passed down through inheritance, no tax would be payable at that time.

“The TWG did not recommend a 33 per cent rate for taxing income from capital gains. Instead it recommended that the gains be taxed at a person’s marginal tax rate, like other income. This means that the tax rate a person pays will depend on how much income they earn and their amount of capital gains.

“The TWG also recommended that if a retiring business owner, such as a farmer, sells their business, the first $500,000 of capital gains be taxed at their KiwiSaver tax rate. The top KiwiSaver tax rate is currently 28 per cent.

“Take, for example, a dairy farm purchased for $1.5 million 20 years ago, and worth $3 million at the time the new tax on capital gains comes into effect (excluding the family home). Suppose the farmer sells it 10 years later when they’re retiring, and the value of the farm has increased by around 3% each year so that the farm is sold for $4 million. Suppose also that the farmer made $70,000 of other income in the year of sale. The farmer will have made a $1 million capital gain from the time the new tax comes into effect, which would be taxable. $500,000 of this gain would be taxed at 28% (assuming this was the farmer’s KiwiSaver tax rate in each of the previous two years), while the rest of the capital gains would be taxed at 33% This would leave the farmer with a tax bill of $305,000 from selling their farm for $4 million.

“Of course, the family home will be exempt. Further, if the farm was passed on through inheritance, the tax would be deferred until it was sold.

“It’s great to see people engaging in the debate. These are important matters, so it’s important that people have the full picture” Sir Michael said.


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Tax Working Group delivers Final Report

Source: New Zealand Government – Tax Working Group

Concerns about the structure, fairness and balance of the tax system have led to the Tax Working Group recommending the Government tax more income from capital gains.

Group Chair Sir Michael Cullen says our system has many strengths but there is a clear weakness caused by our inconsistent treatment of capital gains.

“New Zealanders earning just salary and wages are taxed on their full income but we have several situations where you can earn income from gains on assets and not be taxed at all.

“All members of the Group agree that more income from capital gains should be taxed from the sale of residential rental properties. The majority of us on the Group, by a margin of 8-3, support going further and broadening that approach to include all land and buildings, business assets, intangible property and shares.

“We have judged that the increase in compliance and efficiency costs is worth it if we can reduce the biases towards certain types of investments and improve the fairness, integrity and fiscal sustainability of the tax system.”

The Group recommends that a tax on capital gains would kick in when an asset is sold or changes hands and would be applied with no discounted tax rate and no allowance for inflation. Gains would be calculated from when any new law comes into force.

Three members prefer for this to apply only to residential rental property.

Sir Michael says the Group has presented the Government with choices and options rather than a rigid blueprint.

“The Government doesn’t necessarily need to make a straight call over whether or not to adopt the Group’s preferred model for taxing more capital gains. It could choose to apply it to only some types of assets or stagger the inclusion of different assets over time. It may decide to apply the deemed return method to property. All these options are open to the Government.”

The Tax Working Group estimates that broadly taxing more income from capital gains will raise roughly $8 billion over the first five years.

“If the Government chooses to proceed down this path, it then unlocks opportunities to reduce taxes in other areas so we have given them some options to consider,” says Sir Michael.

Lowering personal income tax

The Group has investigated a range of reductions in personal income tax. Its preferred approach is allowing New Zealanders to earn more at the lowest tax rate of 10.5%. This would reduce income inequality, benefit all full-time workers, and support those transitioning into work.

Encourage savings

The Group has identified a range of measures to encourage saving, targeting those at lower- and middle-income levels. These include refunding the Employer Superannuation Contribution Tax (ESCT) for KiwiSaver members earning less than $48,000 a year and cutting the KiwiSaver tax rates for low- and middle-income savers.

These reductions would mean that this group would pay less tax overall on their KiwiSaver, even if the income from capital gains on their accounts is taxed.

Supporting businesses

The Group sees the current approach to the taxation of business as largely sound and sees no case to reduce the tax rate or introduce a progressive scale for companies. However, it is recommending measures to help businesses to grow, be more productive and lower what they spend complying with our tax rules.

Further recommendations

“Deliberations over extending the taxation of capital gains have taken up a considerable amount of time but our final report is about far more than that single issue,” says Sir Michael.

“The report has a strong focus on the environment and recommends better use of taxes to discourage activities that cause negative impacts. We have developed a framework for deciding when such taxes can be best applied.

“Transitioning to a more sustainable economy is a long-term project but we are recommending to Government that increasing the rate and scope of the Waste Disposal Levy; strengthening the Emissions Trading Scheme; and using congestion charging on our roads should be immediate priorities.”

Enhancing the integrity and administration of the tax system

The Group has recommended a number of measures to safeguard the integrity of the tax system and improve its administration, which it thinks should be implemented regardless of whether a tax on more income from capital gains goes ahead.

  • Increased enforcement of closely-held companies as there appears to be a set of integrity issues around their tax affairs.
  • Inland Revenue’s crackdown on the hidden economy could be strengthened with the introduction of stricter reporting requirements.
  • A single Government debt collection agency should be established to achieve economies of scale and fairer outcomes for New Zealanders who owe money to the Government.
  • A taxpayer advocacy service should be established to help small taxpayers in dispute with Inland Revenue.
  • Regular reviews should be conducted of the charitable sector to ensure the tax concessions enjoyed by the businesses they run are being put towards the intended social outcomes.

“The Final Report represents the end of our work on the Tax Working Group but the national conversation we’ve all been having about tax will continue,” says Sir Michael.

“We encourage all New Zealanders to stay involved as the programme of tax reform is developed. Together, we can – and should – shape the future of tax.”

Read the Final Report with supporting videos and factsheets at