The New Zealand government has updated its short to medium-term priorities for tax reform by releasing a "refreshed" Tax Policy Work Programme (work programme). While the government has retained many of its existing tax reform priorities, new priorities include a possible tax incentive for investment in nationally-significant infrastructure, and "enhancing economic performance" through business-related tax reform. In announcing the work programme, the minister of revenue stated: "Tax policy has a big role to play to encourage productivity and growth."
A tax incentive for nationally-significant infrastructure?
The tax working group, set up by the New Zealand government to make recommendations on the fairness, balance and structure of the tax system, recommended earlier this year that the government "consider developing a regime that encourages investment into nationally-significant infrastructure projects". Addressing infrastructure issues has been a priority for the government, with a new independent commission recently established to "enable coordination of infrastructure planning and provide advice and best practice support to infrastructure initiatives".
The tax working group's recommendation was in response to a proposal that investors pay a concessionary rate of 14% (i.e. half the current company tax rate) on profits made in New Zealand from qualifying infrastructure projects. Under that proposal, qualifying investors would need to have "demonstrated capability to deliver world-class infrastructure projects" and "would also need to bring expertise that is not ordinarily available in New Zealand and commit that expertise to the delivery of the infrastructure".
Enhancing economic performance through business tax reform
The minister of revenue stated that a "key workstream" of the updated work programme focuses on "minimising compliance cost for businesses; and lifting the economic performance of all businesses, especially smaller firms and the self-employed". While the government has not listed specific tax reform measures that it will progress as part of that workstream, it has already announced that it will "change New Zealand's 'loss continuity rules' to make it easier for start-ups to attract investment and get off the ground".
Under the law, a company's tax losses are forfeited if there is a more than 51% change in the ownership of the company from when the tax loss arose. As a result, when companies raise capital to fund growth and other requirements, the shareholder continuity requirement may be breached and tax losses forfeited. Other countries have addressed this impediment to businesses raising the capital they need to grow by allowing losses to be carried forward if the company's business remains the same or similar.
The government has also announced reform to allow deductions for "feasibility expenditure", being "costs associated with exploring whether to invest in a new asset or business model..., including for projects that don't end up going ahead". Under current law, such expenditure may be at risk of not being deductible when incurred (because it is capital in nature) and also not qualifying as part of the cost base of a depreciable asset (because it is too preliminary to relate to a particular asset, or because the relevant project does not proceed).
Implementation of the work programme
The tax law reform process in New Zealand ordinarily involves public consultation prior to the government making a decision on whether to progress with a reform. Given the time required for policy development and consultation, the government will need to move quickly if it is to start implementing its new reform priorities before the next general election (which in the ordinary course would be expected in late 2020).