Politicians make many promises in the lead up to an election and taxes are always front-and-centre. That is because tax revenue is what makes the promises possible. Therefore, deciding how much tax to collect, who from, and how to collect it is a key role of government.
The COVID 19 emergency has created a situation where the Government needs to spend a lot of money to support our health system and to aid our financial recovery. Hard working Kiwis and our businesses are unable to afford to contribute all that is needed, meaning that the remainder will be borrowed and the debt serviced by taxes paid in future years.
This week, Steve Dawson has taken a look at the various promises made by the political parties and has summarised the more likely outcomes and what they mean for businesses and taxpayers.
A quick recap on the election results, in case you missed it:
- Labour: 49.1%, giving 64 total seats
- National: 26.8%, giving 35 total seats
- ACT: 8.0%, giving 10 total seats
- Green: 7.6%, giving 10 total seats
- Māori: 1.0%, giving 1 total seat
- Other parties: 7.6% combined, with no seats won.
At time of writing, special votes are still to be counted which could affect the percentages and seats above. Most notably, the Māori party is only leading the Waiariki electorate by 415 votes, and the Green Party is leading Auckland central by just 492 votes. Anyone who was watching on the night will know that these are two results to keep an eye on as the special votes come in.
In terms of who will be governing, Labour has a clear majority with 64 of the 120 seats in parliament, and Jacinda Ardern has confirmed that there will be no formal coalition with the Green party. However, even with Labour governing alone, other parties are still able to put forward Bills so we cannot categorically rule out the possibility of tax policies from National or other parties coming through in some shape or form.
First, a quick reminder of the COVID assistance already made available by the government – see our updated blog post here. In particular, the Small Business Cashflow Loan Scheme and tax loss carry-backs are still available, as well as beneficial tax changes around depreciation and capital expenditure. Get in touch with us if you have any questions or need assistance with any of these.
And now, a brief look at tax policies promised or suggested by each party recently. I’ll limit it to the parties that currently have a seat at the table:
- Introduce a new tax bracket of 39% for income over $180,000
- No other new taxes or increases to taxes, including fuel taxes
- Wealth tax and capital gains tax have specifically been ruled out by Jacinda Ardern as long as she is in charge. Although, it’s still possible that there may be changes to existing rules around bright line rules, and when tax is payable on the sale of shares
- Make the Small Business Cashflow Loan Scheme available for a further 3 years, and extend the interest-free period
- Overhaul the AIM tax system
- Change the test for tax losses carried forward to a business continuity test (rather than an ownership test). This was a recommendation from the Tax Working Group and Grant Robertson announced that this is in the pipeline. We do not have much information on it yet but will let you know if this gains momentum - it is certainly and interesting change and could be of benefit in many scenarios.
- No new taxes
- Temporarily adjust the tax brackets to reduce the tax paid for all salary and wage earners
- Introduce a 3-yearly adjustment to tax brackets in line with the cost of living
- Increases to capital expenditure deductions and depreciations rates, some temporary and some permanent
- Exempt electric vehicles from FBT until 2025
- Raise the threshold for GST registration to $75,000
- Increase the provisional tax threshold to $25,000 and review use of money interest (UOMI) policies and thresholds at which Inland Revenue can charge interest on short paid taxes.
- Change the test for tax losses carried forward to a business continuity test (rather than an ownership test).
- Introduce a wealth tax of 1-2% on net wealth above $1 million
- Introduce two new income tax brackets above $100,000
- Exempt electric vehicles from FBT (a similar thought to National, so this may gain momentum)
- Tax money made by large digital companies in NZ (Facebook, Amazon, etc)
- Temporarily cut GST from 15% to 10%
- Decrease the tax rate for the $48,001 to $70,000 tax bracket to 17.5%
- Capital gains tax of 2% per annum on appreciation of any homes that are not the family home
- A 2% tax on vacant “ghost” houses
So… What Is Actually Likely To Happen?
Among the policies above, as well as the policies of the minor parties that did not win any seats, there are some clear themes.
Mounting support for Capital Gains Tax or Wealth Tax
The Tax Working Group recommended a capital gains tax, and over the 2020 election these ideas were put forward in some form by more of the political parties. There is mounting support for either a Capital Gains Tax or a Wealth Tax of some sort but with Jacinda having specifically ruled this out as long as she is the leader of Labour, we can be fairly confident that no such taxes will be implemented any time soon, unless Labour has a change of leadership and remains in power.
Whilst there is still opposition from the National and Act parties to wealth or capital taxes, it seems likely that these issues will surface again – potentially as early as 2023. As mentioned earlier, the promise of no ‘new’ wealth tax does not rule out changes to existing rules around the taxation of capital gains.
Most parties agree there are adjustments needed to our income tax brackets. Some parties want to focus on decreasing tax for average income earners while others want to focus on increasing it for high income earners. Our current income tax brackets have not changed since October 2010, and with Labour governing alone it is almost certain that their new tax bracket of 39% for income over $180,000 will come in, likely from 1st April 2021.
Any other changes are less certain because Labour has not indicated that they will make any other adjustments. However, with almost every other seat in parliament wanting to update the middle tax rates, it is possible we will see the tax brackets shuffle around within the next three years and potentially see the introduction of a policy that indexes the brackets to cost of living and inflation. This is all speculation for now though, and we’ll be sure to keep you in the loop when the details are announced.
Extension of the Small Business Cashflow Loan Scheme
The only other policy of significance from Labour right now is the extension of the Small Business Cashflow Loan Scheme. This is an interest free loan generally available to any business that received the wage subsidy.
We highly recommend that you talk to us about this if you’re struggling with cashflow at all – or even if you are simply looking to maximise your cash position in light of an uncertain future. Currently the applications are open until 31st December 2020 but given Labour’s promise, we hope to see this extended along with an additional year added to the interest-free period (currently one year).
Labour, as well as the Greens, have expressed interest in making sure that digital companies pay their fair share of taxes in New Zealand. GST rules were changed a few years ago to impose GST on digital products and services sold in New Zealand, and as a result we saw the prices of some of these increase, for example - Netflix subscriptions.
This may happen again if companies end up having to pay more tax in New Zealand, although the desired outcome will be to work with the OECD and ensure tax is paid fairly based on where the income is sourced.
We hope this will eventually mean a fairer playing field for NZ businesses and also that the NZ government gets a fair share of tax revenue from these companies. We note that these rules are changing in many other countries around the world. Therefore, if yours is a business exporting to other countries (e-commerce for example), then we recommend that you ensure that you can track sales by region and that you keep abreast of the specific rules and how they may apply to you.
Loss continuity rules
Changes to the loss continuity rules were recommended by the Tax Working Group and are also supported by the National Party. The current rules make it more difficult for businesses to raise capital because accumulated losses are forfeited where 'shareholder continuity' of st least 49% is not maintained. The suggested change is to encourage investment into Kiwi businesses by moving to a system where risk is treated more neutrally. The changes also align with other countries and trading partners such as Canada, where losses can remain available so long as the new ownership continues to operate a similar business.
The Green Party and the National Party each have policies around relaxing FBT on electric vehicles. We think that this will be
one to watch out for, especially given the alignment to the Government's focus on reducing our carbon footprint and improving the
All in all, the answer to the question “What does the 2020 election mean for taxpayers?” can be summarised as “not much”, aside from the new tax bracket and continued COVID relief initiatives that are mostly already in place. However, there are definitely some policies to keep an eye on.
We are still waiting on the exact details so in general terms would advise against making changes until things are more certain.
Given that there are also changes to family trust rules in place from January 2021, along with a changing economic environment, now's the time to review your structure so that you understand how these changes affect you and ensure that you are set up with the future in mind.
If you might be affected by the $180,000 tax bracket we can also talk through how you can plan for this as part of the bigger picture. Remember, your taxable income is not limited to just salary and wage income. If you have a company or trust that allocates profit, pays out dividends or makes distributions, then it will be worthwhile to think through the timing of these transactions. Likewise, if your company is carrying a large amount of retained earnings then it may be wise to work through the possible implications of distributing these before the new rules take effect and apply an extra 6% tax on some amounts. .
Perhaps not the answer some of us had hoped for, or perhaps cause for a sigh of relief! Tax is a complicated subject and taking action without seeking advice can result in unintended consequences. Whatever happens, we will be sure to keep you updated on any policy changes that could affect you via this blog and our email newsletters. Until then, feel free to get in touch.