Brendan Brown and Mitchell Fraser of Russell McVeagh explain how tax policies are set to play a pivotal role as New Zealand heads to the polls.
New Zealand's general election is due to be held on September 19 2020. Tax policy announcements so far (by two of the minor parties) seem set to ensure that tax reform and possible tax rate increases will be live issues in the election campaign period.
The election comes at a time when New Zealand is projecting significant fiscal deficits due to the fallout from COVID-19. Also part of the backdrop to this election is the governing Labour Party's decision not to implement a capital gains tax, as recommended by the Tax Working Group that it established after taking power in late 2017. The proposed capital gains tax was subject to considerable public opposition and the Labour Party was unable to secure support for the tax from its coalition partner, New Zealand First. Prime Minister Jacinda Ardern subsequently abandoned the proposal and committed not to seek to implement a capital gains tax while she is in office.
Proportional representation system
New Zealand has a mixed member proportional electoral system. A political party's representation in parliament broadly reflects the proportion of votes cast for that party nationally, with the major parties usually requiring the support of one or more smaller parties to be able to secure a majority and form government.
This was illustrated in the most recent general election (held in 2017). The New Zealand First Party (with 7.2% of the popular vote) formed a coalition government with the Labour Party (36.9% of the popular vote) with the support of the Green Party (at 6.3% of the popular vote), despite the National Party commanding a greater share of the popular vote (at 44.4%) and being the largest party in parliament.
A further consequence of this is that smaller parties (especially New Zealand First, which positions itself as being able to support either of the two major parties) can exercise significant influence over government policy. The New Zealand First Party's unwillingness to support a capital gains tax during the current term was an example of this.
Green Party proposes a wealth tax and higher income taxes
The Green Party's flagship election policy (its ‘Poverty Action Plan’) seeks to introduce a guaranteed minimum weekly income of NZ$325 (US$216) for every person (including students) not in full-time paid work. It proposes to fund this policy through:
- A comprehensive wealth tax on net assets that exceed certain thresholds (1% on net assets worth over NZ$1 million and 2% on net assets over NZ$2 million); and
- Income tax rate increases for individuals. The proposal is to introduce a 37% rate for income over NZ$100,000 and a 42% rate for income over NZ$150,000 (currently a 33% rate applies to all income over NZ$70,000).
Other Green Party tax policies include establishing an Ecological Tax Commission, tasked with researching and providing recommendations on possible new ‘eco-taxes’, and the introduction of a tax-free threshold on income up to NZ$10,000. Additionally, the Green Party supports the introduction of a comprehensive capital gains tax (with an exemption for the family home), although such a tax was ruled out by Labour leader Jacinda Ardern in April 2019.
ACT Party proposes an income tax-funded employment insurance fund
The ACT Party is the only other party currently represented to have announced its tax policy. ACT is proposing to keep income tax rates unchanged, but allocate 0.55% of tax paid to a ring-fenced employment insurance fund. On the loss of employment, a taxpayer would be entitled to claim 55% of their average weekly earnings over the previous 52 (or fewer) weeks (up to a maximum of NZ$60,000). ACT proposes to keep the 0.55% allocation under review, balancing funds between high and low-unemployment years.
Further tax policy announcements are expected
Whether the Green Party or ACT Party's proposed tax reforms are likely to come to fruition is far from certain. Following the Green Party's announcement, Jacinda Ardern commented that her Labour Party's yet to be released tax policy would "look very different". Meanwhile, the leaders of the New Zealand First and ACT parties separately labelled the Green Party's proposal an ‘envy tax’.
The largest of the opposition parties, National, has promised to introduce no new taxes in its first term of government. It remains to be seen whether the Labour Party will adopt a similar line, or will look at raising the top personal rate of tax. Also in the mix is the possibility that the Labour Party will signal its willingness (if it is returned to government) to implement a digital services tax if the ongoing talks on the OECD's pillar one and pillar two proposals do not lead to a multilateral solution.
This article first appeared on the International Tax Review website here.
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