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Thomas Pippos |
On November 8 2008 New Zealand saw the nine year centre left Labour-led government toppled by a centre-right National-led government.
The upshot of the change in the economic environment is that a number of tough decisions will need to be made including from a tax perspective.
While still staring at what is largely a blank canvass, National is promising to follow through with its personal tax cut package and spending promises largely developed before recent treasury forecasts that indicate deficits for the next 10 years, a shock to most New Zealanders who have become used to year on year surpluses.
The only major tax related announcement that does not concern personal tax rates was negative - the National Party's proposition to abolish the newly established research and development (R&D) tax credit regime. Now that National is to govern it seems that this policy will be implemented, even though it was seemingly made in haste to evidence how its personal tax cuts could be made without exacerbating the anticipated budget deficits. There is the possibility that it may be replaced with something else or even remain but in a limited form.
Clearly, from a business standpoint, the loss of the R&D regime is a major disappointment, at least to those businesses that undertake R&D, noting that the regime is only in its first year of operation and global competitiveness in this area is extreme.
But the exact nature of tax changes under the new government is far from clear and likely still being developed. Only as an example, it now seems that the emissions-trading regime that was all but implemented may well be replaced with a carbon tax. Whether this is good or bad depends on your perspective. But this may be more of a sign of things to come as the new government starts with limited baggage and a mandate which is imperative - to navigate New Zealand's economy during these times, with tax being one of its navigational tools.
Critical to this are that decisions are rational and appropriately considered. A recent example of a policy announcement that was neither was a Labour Party announcement that if elected they would decrease the underpayment use of money interest rate from 14.24% to match the overpayment rate of 6.66%. For a number of reasons it is not expected that this initiative will progress.
The extent to which the new government will use its tax lever to stimulate economic growth is uncertain but as the economy is on the top of the new government's list of imperatives the expectation is that a number of tax initiatives will be considered as part of an ongoing stimulus package.
The expectation is also that these initiatives will extend further than its stated goal of a three-tier personal tax system with the highest rate being 33% (as opposed to the current 39%).
One of the groups that will be most challenged by all of this will be officials whose traditional thinking has been to make the tax system neutral despite competing with other systems that are not.
Without pre-empting what any final set of initiatives could include, an area that does warrant attention and which could have real benefit for New Zealand is addressing the current tax disincentives that exist for non resident investors, in particular, to own New Zealand businesses with domestic equity participation. Addressing this could facilitate a deepening of New Zealand's capital markets which in itself provides a buttress to the corporate tax base.
Other micro matters that could be considered include allowing more taxpayers to use the cash basis of accounting for goods and services tax (GST, the New Zealand equivalent to VAT). This allows the taxpayer to defer paying GST until the taxpayer has received cash from the transaction. Such an approach is likely to be helpful in the current climate, where debtors are becoming slower to pay.
A further cash flow initiative would be to allow for deductions to be taken for bad debt provisions. At present deductions are only allowed when debts are written off as non recoverable by balance date; however allowing a deduction for bad debts sooner would be of great benefit to taxpayers going through a short term squeeze.
Shareholder continuity rules could also be relaxed down from the current 49% threshold to allow businesses to carry losses forward and still attract more shareholders – important at a time when many shareholders are selling out.
The above suggestions are simply a few easily available options to the incoming government. Whatever happens, decisive decisions will need to be made to ensure that New Zealand business have access to cash, capital and credit.
Again, to some extent the current issues will place considerable pressure on officials to advise government of options and solutions in a negative backdrop, something that they have not been required to do for almost a generation. The net effect of this is likely to be a package of measures, either directly attributable to the current economic climate or asserted to be so, given that a "do nothing" option is likely not to be palatable.
Thomas Pippos (tpippos@deloitte.co.nz)
