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FOOD FOR THOUGHT

Tax policies that ‘make sense’ for businesses heading into the 2017 New Zealand election

Posted by Graham Lawrence on September 07, 2017

Listening to the second leaders debate this week, I could not help but let my mind wander to the same question businesses have been asking for. We need innovative tax policy now which can both redeploy resources, use existing infrastructure better, and propel New Zealand forward.

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Unsurprisingly, as the debate continued the political parties were eager to make promises that put more money in people’s pockets while balancing the demands of public services and infrastructure. The 2017 New Zealand general election while having many twists has not promised any ground-breaking tax policy. From the National Party promising to raise the bottom two tax thresholds, naturally boosting the incomes of families. Or the Labour Party saying it will scrap National’s tax cuts package in favour of pouring more money into Working For Families. The elephant in the room is clearly what the Labour Party intend to do in relation to capital gains tax.

 

It’s a war of words, ideas, and politics.

 

On the whole, the current tax policies are pretty uninspiring. New Zealand businesses want to see political parties being more ambitious and creative with tax policies that support business. As part of my day we constantly deal with growing New Zealand businesses and a few forward-thinking tax policies that the political parties should consider in the lead up to this month’s election, that will foster New Zealand business are as follows;

 

A lower corporate tax rate for 100% New Zealand owned companies

The proposal is for 100% owned New Zealand businesses to have a lower corporate tax rate.

It is not unreasonable to introduce a lower corporate tax rate for resident companies as a way of recognising profits of New Zealand resident owned companies are ultimately taxed in New Zealand. To show this comparison: 

  • When a New Zealand company declares profits to New Zealand shareholders, after having paid company tax at 28%, the shareholders will pay personal income tax effectively up to 33% after a credit for any company tax is passed on. Ultimately, the payment of this tax is only a timing issue for the Governments tax revenue.
  • When a New Zealand company declares profits to non-resident shareholders, after having paid company profits at 28%, no further tax is typically due. Furthermore, the rate of company tax could be reduced as low as 5% if transactions are entered into with their overseas companies.

Put simply, if a New Zealand owned company was taxed at a lower corporate tax rate this provides much needed additional cash that can be reinvested back into the local economy in ways that non-resident owned companies would naturally not consider.

 

Tax incentives if a company relocates

The proposal is for any New Zealand business to have a lower corporate tax rate if it relocates part or all of its business to regions outside of cities that are bursting at the seams where the pressure on housing and infrastructure is immense.

It is widely acknowledged that cities such as Auckland are struggling with infrastructure and there does not appear to be a short-term solution available.

It was impressive to see the recent example of Xero opening a new office in Napier, creating new jobs in the region. If a business could be incentivised to relocate part or all their business from the main cities to another part of the country. This could provide a multitude of benefits for the wider NZ economy. We believe this could result in;

  • Less stress on infrastructure;
  • Better utilisation of health and schooling resources;
  • New Zealanders being able to afford their first home without being restricted by lifetime of debt.

 So how do we encourage businesses to do what Xero did? One way would be to reduce the corporate tax rate (or other taxes such as FBT) as an incentive for companies to relocate. The reduction in tax makes sense as it is a boost straight to the bottom line of businesses to then go invest in local resources.

 

Moving businesses outside of say Auckland and Wellington will also relieve some of the pressure on transport and other services such as schooling in the main centres.

 

This policy is also attractive for staff seeking a better quality of life and more affordable housing, and would flow on to help kickstart regional economies.

 

Research and development tax credits

The proposal is to reintroduce the research and development tax credit rules.

 

A lot has been said by both The Labour Party and the Green Party that they will re-introduce tax credits for research and development (R&D)

 

These same tax credits for R&D were scrapped by National, then replaced by a grant system administered by Callaghan Innovation.

 

National’s theory was that it stopped companies from “gaming the system” by reclassifying spending to qualify for tax credits.

 

It is well acknowledged that New Zealand is innovative so why do we not reconsider the R&D tax credits system? The issue that has been raised by many is that the definition of R&D was previously very broad and able to be stretched, rather than serving its intended purpose of fostering innovation.

 

The question I’ve got is, why reintroduce these rules if they did not achieve the targeted outcome? Overlaying this however is a worthwhile debate because our major trading partners have these tax credit rules and we have to ask ourselves have we got it right? Or have we got it wrong?  

 

On balance, I believe we should have R&D tax credit rules and if there were historical problems with companies “gaming the system” Then the rules need to be tightened to ensure the rules promote real R&D and subsequent innovation as this is a large part of where New Zealand needs to be heading as a nation.

 

Supporting staff and families

The proposal is to introduce one tax return for a couple who live together, or income splitting as it is more commonly referred to.

 

Income splitting is where each partner in a relationship is taxed on an equal share of their combined income.

 

The concept was introduced by former United Future leader Peter Dunne in 2008. Income splitting is an easy and innovative way to help support families financially. At the time, Mr Dunne said it would benefit 310,000 Kiwi families, but the policy was deemed too expensive and never gained traction.

 

This should be relooked at, as with the increased cost of housing more and more families are two working families so what we would be doing is recognising a couple as one unit and filing only one tax return, clearly a win in the move to reduce compliance costs.

 

Capital Gains Tax anyone?

The Green Party is the only major player to put forward a clear policy in support of a capital gains tax. The Labour Party are rather cagy on this topic although it appears that any change would be 18 months away, if anything.

 

The last thing New Zealanders need is more rules which end up only benefiting professional accounting firms.

 

National has its “bright line test”, which is essentially a capital gains tax on investment properties sold within two years of acquisition.

 

Labour has said it wants to extend the time period to five years. The party also said it will establish a tax working group to consider things like a capital gains tax, but isn’t campaigning on this policy.

 

Capital gains taxes are hugely complicated and to achieve the “biggest bang for your buck” it may make more sense to do one of two things:

  • Ring fence any rental property loss to only future rental property income;
  • Providing more support to Inland Revenue to enforce current property taxation rules.

The last thing New Zealanders need is more rules which end up only benefiting professional accounting firms.

 

Where to from here? 

My view has always been to keep it simple and support New Zealand businesses. I feel we need to start thinking outside of the box and consider what makes sense for New Zealand and then what levers can be pulled to achieve this. I am hopeful that the elected Government looks at tax policy moving forward in an innovative way that supports growing New Zealand business and New Zealanders who are the backbone of this country.

 

Topics: Tax