The curiously low key Beehive

: Revenue and Small Business Minister Stuart Nash and Finance Minister Grant Robertson last week reacting to the Tax Working Group report. They haven't said much this week either.
 

What has been remarkable about this recess week has been how little the Government has said about the Tax Working Group.

There were two showpieces; Jacinda Ardern’s press conference on Monday and a Grant Robertson speech to a business breakfast in Auckland on Tuesday.

But you won’t find Robertson’s speech on the Beehive speeches website.

There will be another speech today from Revenue Minister Stuart Nash in Queenstown to a tax conference which must surely talk about the Tax Working Group.

In contrast, National has bombarded the media with a barrage of press statements and MPs have been tweeting and speaking all over the p[lace continuing their Opposition to a report they believe could turn the Ardern government into a one-term government.

All of which raises the question as to how seriously Labour is selling the TWG report.

In contrast, after last year’s Budget, in the week immediately after it was tabled, Robertson delivered five post-Budget speeches in Auckland and Wellington, Palmerston North, Tauranga and Whakatane.

This lack of push for the report adds weight to the theory that the Government may back away from some of it.

There are growing suggestions that just getting a consensus with NZ First on what action to take on the report will be difficult enough and there are reports that at least one of the Economic Ministers is opposed to implementing much, if any, of it.

NZ First has said it opposes a capital gains tax on family farms and it is understood the party also opposes a tax applying to small business.

Though the tax Working Group has said family farms which are passed on by inheritance would not attract the tax, the actual practice in the farming community where siblings buy each other out and land is bought and sold as farming practices change, means that an inheritance-only exclusion would still leave many owner-operated farms facing the tax.

Federated Farmers Vice President, Andrew Hoggard, says the tax working group “have badly underestimated the complexity and compliance costs of what they're proposing and over-estimated the returns."

The situation around small business is less obvious.

The Auckland Employers and Manufacturers Association, which has the country’s largest small business membership base, did not even discuss the application of a capital gains tax to small business in their submission to the working group.

The working group itself devoted a considerable amount of time to looking t ways of making tax compliance easier for small business which has come through in the final report with recommendations.

Even so, the Government has received considerable criticism from small business about the report and the Prime Minister herself at her press conference on Monday was cautious to the point of almost denial about whether the Government would proceed to apply the capital gains tax to small business.

“I have in my mind a range of experiences, a range of views, that I will—as will all of us in Government—be weighing up when we determine which option that we adopt and where we form consensus<” she said in response to a specific question about the tax on small business.

“And, really, this is a reassurance that we hear all those views and that we will be weighing all of them up in our ultimate decision.”

There are options available to the Government.

In Australia, for example, any capital gain is discounted by 50% if the asset has been owned for more than a year.

And capital gains tax does not apply to small businesses that have been owned for 15 years or more and applies at only 50% of the stated rate if a business has been owned for more than 12 months. (And that is on top of the 50% assessment discount.)

If the owner is retiring and is liable for any capital gains tax, all gains up to $500,000 are exempt.

NZ First has made it clear it is interested in the views of the former IRD Commissioner Robin Oliver who is believed to have been the principal author of the Minority Report from the three Working Group members --- Oliver, Joanne Hodge and Kirk Hope – who dissented from the main report.

Their report says: “ We agree that there is a strong case for extending the extent to which New Zealand taxes what are now untaxed capital gains.

“However, we consider that the costs of extending the tax rules in a comprehensive manner, as proposed in the Group’s Final Report, would outweigh the benefits.”

Their report said the case for taxing more gains from residential rental property was clearest.

Interestingly in the minutes of the Grou for December 6, 2018, which have now been published on its website, there is a  reference to a need for Inland Revenue to more aggressively enforce the current Brightline capital gains taxes on rental housing.

"If gains from the residential property are to be more fully taxed, then this could be done with some modifications by extending current rules, including the bright-line tests," the minority report said.

What this suggests is that it might be possible to craft a capital gains tax that was basically an extension of the existing Brightline test and which was accompanied with more aggressive enforcement and that would receive the unanimous support of the Working Group and possibly NZ First.

During his media briefing, on the launch of the report, Michael Cullen alluded to the so-called "mansion effect" whereby homes become substantial stores of value.

As an example, a house belonging to former Lion Breweries and Saatchi and Saatchi CEO, Kevin Roberts, in Auckland is on the market for $12.8 million.

Whatever capital gain he makes, and it is likely to be substantial, would be tax-free under the Capital Gains Tax proposed by the working group because the Government ordered them to exclude the family home.

In cases like the Roberts house,  an untaxed capital gain of several million dollars would hardly seem to be compatible with the Government's intention to restructure the tax system to make it fairer.

But the minutes of the Working Group show that it discussed this sort of situation at its November 22 meeting and wondered whether the Government should consider a cap on the value of the family home.

If a rental housing only capital gains tax was proposed, then an extension to gains above a certain threshold for "mansions" might be a useful political concession to make to Labour’s activist base.

But the problem with limiting a capital gains tax in its application to farming and small business is that it will reduce the income from the tax and thus the flexibility of the Government to cut taxes.

The Government has always made it clear that the Tax Working Group’s prime objective was to address fairness.

“I encourage everyone to keep in mind why we set the Tax Working Group up, which was, ultimately, to look into issues of fairness, balance, and structure of New Zealand's tax system," Jacinda Ardern said on Monday.

But her Government had already introduced what has been a fundamental contradiction in the work of the group in addressing fairness.

It was explicitly excluded from proposing changes to income tax rates and thresholds yet, for most income earners, according to Michael Cullen, adjusting income tax rates was one of the most effective ways of addressing fairness in their household incomes.

The Working Group was thus hamstrung in two ways -- not able to tax the family home even when it became a mansion and not able to change income tax.

The fact that income distribution in New Zealand is unfair was vividly demonstrated this week when Statistics New Zealand produced its annual household network statistics which showed that households with an income of over $148,730 held 70% of the wealth in the country with an average net worth of $870,000; households earning between $102,548 and $148,730 had an average net worth of only $379,000.

Forty-four per cent of the top wealth quintile's assets were categorised as “other real estate” apart from the family home.

These are the figures that the Cabinet will have to stack against the clamour of the opposition to the Working Group’s proposals.

But does the Government's silence this week mean they can’t defend the proposals – or they are unwilling to?

 

 

 

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