Our recently published article in the eJournal of Tax Research examines tax reform in New Zealand over the last four decades, contrasting this with Australian developments. We consider tax reform from three perspectives: tax policy, tax law and tax administration, drawing insights from Professor Binh Tran-Nam’s scholarly work examining Australia’s experience.[1]
Differing drivers
While both countries have experienced major tax reform in recent decades, identified drivers of tax reform differ.
In Australia, as Tran-Nam observes, tax reform has been driven by the need to modernise to efficiently collect adequate revenue, to harmonise with international tax practices, to reflect contemporary issues, and to adapt to changing practices adopted by multinational enterprises. Conversely, in New Zealand, the drivers have included economic restructuring and liberalisation, increasing neutrality, reducing complexity, and removing prior political influences in the tax system.
Broadening the tax base
A useful guiding principle for tax reform is the broadening of the tax base. This principle has informed much of New Zealand’s tax reform from the 1980s. Similarly, Tran-Nam’s study suggests that Australian tax policy reform over the past 30 years “can be characterised in terms of base-broadening and rate reduction”.
The particular need for the broadening of the tax base in New Zealand in the 1980s relates to the historical erosion of the tax base through tax exemptions, incentives, and rebates. The reforms of the mid-1980s introduced a fringe benefits tax (FBT) and a goods and services tax (GST), together with the closure of many company tax loopholes, and removal of many tax concessions, such as accelerated depreciation allowances.
Base broadening was again used in the 2010 Budget. New Zealand implemented a “tax switch”, reducing taxes on income while increasing taxes on consumption and property investment income.
Before 1984, tax policy was used for economic management in New Zealand, with tax breaks provided to certain industries or activities. Examples include accelerated depreciation (introduced in 1945) and investment allowances (introduced in 1963), both of which were phased out by 1993.
However, unlike Australia, New Zealand has never introduced a separate regime to tax capital gains. Rather, it has sought to tax certain “capital gains” as ordinary income and apply the standard income tax rates to those gains. Numerous attempts to progress this debate in New Zealand have failed. This remains a significant deficiency in New Zealand’s “broad base low rate” (BBLR) framework (along with the absence of any specific taxes on wealth), and a significant divergence between Australia and New Zealand’s tax policy reform agendas.
Consumption tax reform
Like Australia, before the introduction of the comprehensive GST, New Zealand also had a wholesale sales tax. Australia’s wholesale sales tax was introduced in 1930 at a flat rate of 2.5 per cent, New Zealand’s was introduced in 1933 at a flat rate of 5 per cent. At the end of its life, New Zealand’s wholesale sales tax had 12 different specific and seven ad valorem rates that ranged from 10 per cent to 60 per cent “on an arbitrary selected one-third of total personal consumption”.
Currently, GST accounts for around one-quarter of New Zealand’s total tax revenue. While the introduction of the GST is perhaps the most successful tax reform from the perspective of efficiency and relative simplicity, failure over time to recognise the regressive impact of the GST has severely affected many lower-income earners in New Zealand.
When GST was introduced in Australia in 2000 it, like in New Zealand, was accompanied by a package of tax reforms including changes to social security and family assistance, personal income tax rate reductions, and business tax reforms. However, the political environment in Australia necessitated compromises, which resulted in the removal of a range of basic food and other items from the GST base. Thus, while there was general agreement on the benefit of a broad-based consumption tax, the Australian GST did not benefit from base broadening to the same extent as New Zealand.
Income tax reform
Australia’s and New Zealand’s individual income tax rates have both been reduced in two ways over recent decades. These are reductions in the top marginal income tax rate and changes to the income tax thresholds. The top income rate now applies at a similar rate: NZ$180,000 in New Zealand and AU$190,000 in Australia. However, the highest marginal income tax rate is 39 per cent in New Zealand while it is 45 per cent in Australia.
Australia has had a tax-free threshold since 1915, which was initially intended to minimise the double taxation that could occur when individuals paid income tax at both a state and federal level. However, in the present day it is intended to minimise the tax burden on low-income earners.
New Zealand adopts a different approach and taxes from the first dollar earned, with a 10.5 per cent tax rate for income up to NZ$15,600. However, there is a system of tax credits, called Working for Families, which reduce the effective tax rate for lower-income earners. The aim of this is to ensure minimum incomes for those who have families and are employed and is also intended to mitigate potential disincentives to employment for lower-income earners. New Zealand’s approach is more targeted to those who are working with families.
Like New Zealand, Australia also had high income tax rates in the 1980s. Tran-Nam writes that the top rate steadily reduced from 60 per cent in 1985-86 to 45 per cent in 2006-07.
In New Zealand, personal income tax similarly reduced, but over a shorter period of time: from 64 per cent of total tax revenue collected (in 1984) to 49 per cent six years later in 1990. New Zealand’s top personal income tax rate of 33 per cent from October 1988 was the lowest in the OECD. However, it should be noted that eight months after the top personal income tax rate was reduced to 33 per cent, the GST was increased to 12.5 per cent.
Tax administration reform
New Zealand’s response to tax administration reform has been extensive and in many respects has followed or mirrored developments in Australia. For example, drawing upon the gains and enhanced ability provided through digitalisation, Inland Revenue has been able to facilitate real-time receipt of information reporting and payments as it finalised its seven-year Business Transformation project, New Zealand’s largest IT project.
New Zealand’s tax system assumes a voluntary compliance approach by taxpayers to meet their tax obligations, similar to that in Australia. Factors to achieve this include adoption of a new compliance model, adopting a new Inland Revenue Charter outlining taxpayers’ rights, and adopting a more cooperative tax culture.
Conclusion
The New Zealand story with respect to tax reform over the last 40 years parallels the Australian story presented by Tran-Nam. This is certainly no coincidence as policymakers and governments in the two countries frequently meet and share ideas and proposals. That said, Australia and New Zealand have in numerous instances decided to take different paths with respect to their tax reform, tax mix and components of their respect tax administration processes.
[1] Binh Tran-Nam, ‘Australia’s Tax Reform Experience: Lessons for Malaysia’ in Mohamed Ariff and Yeah Kim Leng (eds), Malaysia’s Taxation System: Contemporary Practices, Issues and Future Direction (Sunway University Press, 2020) 240
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