New Zealand: Tax policies to feature in general election

Brendan Brown

Debate over tax policy will feature in the run-up to New Zealand's general election to be held on September 20 2014. New Zealand has a parliamentary system of government, under which members of the legislature are elected every three years. The electoral system is a mixed member proportional system, under which a political party's representation in the legislature is intended broadly to reflect the proportion of votes cast nationwide for that party.

One consequence of that system is that the party with the highest level of support will not necessarily win government, since other parties may combine to form a coalition government or to support a smaller party in minority government. Further, the policies of smaller parties may have a greater prospect of being implemented than would be the case in a two-party system.

The party governing now (the centre-right National party) has been in power for almost six years, and implemented a package of reforms in 2010 which included an increase in the goods and services tax rate (from 12.5% to 15%) and a reduction in the corporate tax rate to 28% and in the top personal tax rate to 33%. In its 2014 Budget, the government projected a return to modest surpluses over the coming years, following a period of large deficits. While the return to surplus has raised the possibility of tax cuts, any tax cuts foreshadowed by the National party in the run-up to the election will likely be modest.

On the other side of the political divide, the left-leaning Labour party (the largest of the opposition parties) is campaigning on a plan to introduce a comprehensive capital gains tax (at a flat rate of 15% but with no indexation, and with an exemption for the family home). Labour would also increase (from 33% to 36%) the top personal tax rate for income exceeding NZ$150,000 ($125,000) a year. The tax rate for income earned by trusts and retained as trustee income would likewise be increased from 33% to 36%.

The Labour party also promises to "clamp down on tax avoidance". One proposed initiative to achieve this goal is for the Inland Revenue to 'embed' auditors within certain corporations that are thought to pose a high risk of tax avoidance.

The Green Party, the largest of the Labour Party's possible coalition partners, is also calling for a comprehensive capital gains tax. The Greens also propose an income tax-free threshold for individuals, and "a suite of ecological taxes on waste, pollution, and scarce resources".

Based on opinion polls, most commentators predict the return of the incumbent government as the most likely outcome of the election. This should see the continuation of existing tax policy settings, and in particular, no capital gains tax in the short term. But increased public acceptance (albeit from a very low base) of the merits of a capital gains tax, along with long term fiscal challenges, mean that the question of whether New Zealand introduces a capital gains tax increasingly appears to be a question of when, rather than if.

Brendan Brown (brendan.brown@russellmcveagh.com)
Russell McVeagh
Tel: +64 4 819 7748
Website: www.russellmcveagh.com

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