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Sir Michael Cullen
Sir Michael Cullen
Sir Michael Cullen is one of the finest finance ministers New Zealand has produced.

It was with much anticipation the accountancy fraternity awaited the release of his interim Tax Working Group report.

Sir Michael was not known for holding back when it came to describing people with substantial incomes and assets. There was some trepidation his first report would contain measures to lift tax rates on the wealthy while adjusting rates for the lower-paid and less well-off in society.

In the end, the report turns out to be a work in progress, progress which will be hastened along because the final report is due in February next year.

Critics have latched on to a sleight of hand by Sir Michael in not using the words ‘‘capital gains tax’’ in the report. Instead, the working group is considering a tax on capital income, almost the same and, so tax experts say, one with wide-ranging effects on New Zealanders who save or invest for their future.

There is no doubt New Zealanders like their property investments. Instead of investing in the sharemarket over the years, many Kiwis buy a second property with the intent of either renovating it and selling it on, or renting it out and using the rent as income.

Previous tax administrations were very generous in how losses or capital expenditure were treated, leading to what some now call a  housing crisis. Property is expensive in Auckland, and becoming more expensive in the South Island — although there is a slowing.

Tax on capital income means any gain from the sale of shares, land or goodwill from businesses, will be taxed at the marginal tax rate instead of a set tax rate of say 15%.

Businesses which employ people, and contribute to the productivity of the nation while paying tax, will be hit with a full tax payment on any gain made when sold. A homeowner in Auckland will receive the full benefit of any capital gain, without incurring extra tax.

Nothing is decided yet and there is sure to be a wide discussion among tax practitioners about the benefits or not of such a scheme.

The rest of the report shows a marked fairness, although some important areas need to be addressed.

One of the areas it is hoped the working group will consider before the final report is released are the choices around retirement savings. New Zealanders save for their retirement in many ways. The working group has recommended a package of modest incentives to encourage low and middle-income people to save more for their retirement.

But it would be disingenuous for the Government to appear to be giving with one hand while intent on taking much more with the other, through a tax on capital income.

Any taxes or concessions for retirement savings need to be fair to all forms of retirement savings. Picking winners by deciding which forms of savings are in or out of favour may create a dilemma for the working group.

The Government needs to rule out taxing any gains on retirement savings to give savers confidence their funds will help them when they finish work.

There is also a hope the working group will consider ways of reducing compliance costs for small businesses which employ most New Zealanders.

Latest figures show 97% of Kiwi businesses employ fewer than 20 staff. But the work they have to do in meeting tax and labour regulations is onerous and can be immense.

Consultation will still happen between now and the release of the final report.

The tax changes, if they come, will not happen until after the 2020 election, giving Labour a crucial chance to explain them to voters before they cast their ballots.

Getting some of the changes past New Zealand First will not be easy, as taxes on capital income will hurt its supporters.

A fair and equitable tax system is essential for New Zealand, given the country’s comparatively small base. Sir Michael knows this and will act accordingly.

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In many cases the amount of capital gains on property could be equivalent to amount of interest that has been paid on top of a mortgage's principal. This interest is subject to banks' requirements to pay taxes.