Labour’s tax policy: what we have now.
Given that Labour have been in government for six years, it is reasonable to assume their tax policy is well represented by the tax system we have in place now – especially given they have enjoyed an unimpeded mandate for the past three years.
Perhaps most interesting is that this government, on the face of it, have not introduced a comprehensive capital gains tax. Before getting to that, it is worth briefly noting some areas of new tax policy that Labour have announced recently.
The first is the proposal to remove GST on fresh fruit and vegetables.
Secondly, Labour are planning to increase some of the Working for Families tax credits to help alleviate the cost of living crisis. Specifically, they propose to increase the in-work tax credit by $25/week, up to $97.50/week. They also propose to increase the Working for Families abatement threshold to $50,000.
The Labour Party expect this will result in 175,000 families receiving an additional $47/week by the end of the following term, should they be re-elected into government. In addition to these policy announcements, the current government have legislation in place to increase the trustee tax rate to 39% from 1 April 2024.
They have also recently introduced the legislative framework for a digital service tax – targeting the revenue generated from New Zealand users by multinational digital services providers such as intermediation platforms like Uber and eBay, social media platforms like Facebook, content sharing sites like YouTube, search engines and the sale of user data.
Back in 2017, leading up to the election, Labour did not campaign on tax change. They promised that there would be no new taxes until the second term. They did, however, immediately establish the Tax Working Group who were charged with looking at the ‘fairness, integrity and balance’ of the tax system.
The majority of the Tax Working Group recommended the introduction of a comprehensive capital gains tax. This recommendation was rejected by the government and the Prime Minister of the day publicly announced that Labour would not introduce a capital gains tax while she remained in that position.
In the following term, the Labour government commissioned the Inland Revenue to undertake a report examining the effective tax rates of New Zealand’s wealthiest families. The results of the report show that New Zealand’s wealthiest people derive significant wealth from several sources that are not taxed due to the tax policy choices of successive governments. It is important to note that the purpose of the report was information gathering only.
However, it did highlight once again that there are many ways that the wealthiest derive wealth that is not subject to taxation. The government response was to once again reiterate that no capital gains or wealth tax would form part of the Labour government’s tax policy.
Despite the rejection of capital gains taxes and wealth taxes, the current Labour government have introduced measures that have had a similar effect. The extension of the bright-line test (“BLT”) from 2 years under National, to 5 and then 10 years under Labour, brings many gains on the disposal of residential property other than the ‘family home’ within the tax base.
These extensions have deviated from National’s original intention to tax the gains derived by property flippers, to include most residential property other than the main home, unless it is held for a longer term. What’s more, the BLT applies at full income tax rates.
This is not an insubstantial tax on capital gains, especially given that many capital gains taxes in other jurisdictions provide discounted rates.
However, by the very nature of a BLT, it either applies, or it does not. Once the ten-year period has passed, any gains on the disposal of the property may not be taxable (subject to the application of the other myriad taxation on land provisions that have been in force since 1973).
On top of the BLT, the current Labour government have also removed interest deductibility for property investors – another measure to take the heat out of the property market by reducing investor demand. While this measure has come under a lot of criticism, including by the government’s own advisors, it may have had some impact on quelling the rampant demand.
The effect of many policies, such as this, are impossible to measure.
Perhaps Labour’s tax policy can best be summarised as more of the same. However, I think it is important to note that they have introduced a quasi-capital gains tax on residential land during the second term. This is not an insubstantial achievement.
Alison Pavlovich is a senior lecturer in the School of Accounting and Commercial Law. She has a strong commercial and academic background in taxation.