CLARIFICATION: In this opinion piece, Connor mentions David Seymour's support for Simon Bridges's indexation bill as an example of how ACT's policy on this issue has shifted.

David Seymour got in touch to point out that he made clear in his speech that his support for Bridges's bill at first reading was conditional on an amendment that would use the revenue earnt from fiscal drag to lower the top tax rate and flatten the tax system. He is quite correct and this particular criticism was unfair and we apologise for the oversight. 

The following is an op-ed by Taxpayers' Union Researcher Connor Molloy

ACT claims to be the party of principle, but when it comes to indexing income tax brackets to inflation, it appears they have lost their way. After rightly criticising the National Party for their U-turn on abolishing Labour’s 39% top tax rate last month, ACT has now done a public U-turn of their own.

Last year, David Seymour supported Simon Bridges’s member’s bill to index tax brackets to inflation. Then, in August this year, Mr Seymour said that tax bracket indexation is “a good start” but that it didn’t go far enough. And now ACT has said they don’t support the policy at all. That’s quite a shift in the space of a year.

But Seymour and ACT have it wrong this time.

When inflation occurs, the prices of goods and services increase, which diminishes the purchasing power of each dollar we earn. This means that if you receive a pay rise in line with inflation, you are not actually earning more income in terms of what you can buy but you end up paying more tax.

Governments of all stripes have been happy to cash in on inflation when individuals’ tax bills increase as a result of being pushed into higher tax brackets or paying a higher proportion of their income at their top marginal rate. Without any consultation or justification, the government is able to receive automatic, unlegislated tax hikes by stealth. This is known as ‘tax bracket creep’ and it makes us all poorer.

ACT’s November newsletter argues against tax bracket indexation on the basis that focusing on taxes without reducing spending leads to more government debt, which is effectively just higher taxes in the future. We agree that tax relief should be funded by savings in government expenditure, but ACT misses the point.

Indexation is not a tax cut. Without indexation, governments get a free pass to increase spending because it is already paid for through bracket creep. Indexation does not reduce the total tax take, it simply doesn’t increase it.

ACT’s new found opposition to indexation stems from confusion because they wrongly conflate different policy issues that should be looked at separately – indexation, distribution of the tax burden, and government spending.

In a system that has indexation, there is nothing to prevent a party from implementing policies that shift the tax burden or cut spending.

ACT’s alternative budget addresses the latter two issues by proposing cuts to government spending, significant tax reductions and a simplification of income tax rates. We support the principle of their proposals but the problem of bracket creep will persist.

ACT argues that “[b]racket creep is not a problem in itself, it is a symptom of progressive taxation.” It’s true that if we all paid a single income tax rate, we would not need indexation. But ACT’s proposed tax system is not flat. Mr Seymour has abandoned his own  2019 tax policy of a single income tax rate. Mr Seymour’s 2022 policy is designed in a way that, over time, taxes would steadily increase year on year.

If ACT’s new tax proposal had been in place since 2017, someone earning $80,000 today would be paying $1050 more tax each year than someone on the same real income in 2017.

ACT could easily advocate for their newly proposed two-tier income tax regime to be implemented and then be indexed to inflation to ensure that the real tax rates remain constant unless changed by Parliament.

It is difficult to understand how ACT reached their current position on this policy when they accept that bracket creep is a tax increase by stealth. Each of their concerns arise from other factors that can be addressed through policies that are not incompatible with tax indexation.

If Seymour truly thought his proposed tax settings were the best for New Zealand, he would commit to indexing them. Otherwise he needs to show some courage and campaign for his 2019 flat tax proposal that would fix this issue completely.

Seymour is clearly positioning himself to play a major part in the next Government. But this U-turn is wrong both in terms of principle and in politics. He should rejoin the cause that even the Nats agree with us on: ‘No taxation without indexation!’

Robin Oliver and Mike Shaw, a former Deputy Commissioner at IRD and former Deloitte tax partner respectively have provided a guest post on the changes to GST relating to bodies corporate announced by Revenue Minister, Todd McClay this morning.

GST and Bodies Corporate

What is proposed?

All Body Corporate supplies under section 84 Unit Titles Act 2010 (all things bodies corporate are required to do) to be deemed to be exempt supplies meaning that bodies corporate are not able to register and receive GST input credits for the GST they pay on purchases.

If the Body Corporate registered before 6 June 2014 (date of announcement) it retains registration BUT is compulsorily de-registered as of 6 June.

There is a complex look-though rule for registered unit holders.  For example a commercial property owned by unit holders who lease offices –  their share of Body Corporate expenses are deemed to be their own expenses so that they can claim a proportion of input credits relating to the Body Corporate.

 Legislation is to be introduced, presumably after the election, which has effect from 6 June 2014.

This is justified by Minister of Revenue as fair, consistent, and reducing compliance costs.

Comments

The proposal is a stunning attempt to legislate by press statement.  The proposal

• Is not fair
• Produces inconsistent tax treatment
• Increases compliance costs.

The proposed legislation by press statement is a naked revenue grab exploiting the misery of the many unit holders who have already suffered as a result of leaky home problems and the costs and misery that entails.  The government helped create the leaky home problem and now they are changing the tax rules to make money out of the resulting misery.

The Proposals are Not Fair

Where a body corporate has been compensated by an out of court settlement to address remediation costs from leaky home problems, post 6 June 2014 they are unable to claim GST on the costs of remediation.  This is in effect a tax grab by the government.  The out of court settlement was paid with no input by the builder/developer etc.  GST was in this way charged on the payment.  This was offset by the payment being free of GST in the hand of the Body Corporate but with GST input tax still available on all subsequent remediation costs.  This no longer applies post 6 June.  The right to input credits is proposed to be removed.  This is a confiscation of GST properly entitled to be refunded to Bodies Corporate and results in two levels of GST being levied (one by the payer of the compensation payment, second on the input tax credit for the Body Corporate).

Many registered bodies corporates have build-up maintenance funds by charging the unit holders levies plus GST.  This will be neutral if the body corporate could recover the GST when they spend the funds to paint the building and undertake their maintenance plans.  Post 6 June 2014, the body corporate cannot claim back the GST on this expenditure, this has resulted in a windfall gain by the Government of GST as GST has been collected on the levies and no GST will be able to be claimed on the subsequent expenditure.

It Results in Inconsistent Tax Treatment

Where instead of getting a compensation payment the builder repairs the building, the builder gets input credits for the costs.  This is the same as current law where the Body Corporate gets the input credit; but it is proposed that these be arbitrarily denied.

Where a Body Corporate employs a cleaner/manager to provide services to unit holders the no GST on that service will now be payable since it is an exempt supply.  If other people purchase cleaning services then GST is normally charged.

The Proposal Will Increase Compliance Costs

For Bodies Corporate which have primarily unit holders that conduct taxable activities, this proposal will materially increase compliance costs in that the GST portion is claimed by the unit-holder and not that body corporate, this will mean monthly reporting to unit holders of detailed financial information (i.e. each payment which has a GST content) to every unit holder.

Legislation By Press Statement Is a Mess

Legislation will not be enacted until some unknown time in the future, therefore what do registered bodies corporate do post 6 June 2014.  Until we have enacted legislation, they are required to comply with requirements to charge GST that will presumably have to be refunded when legislation is enacted.

IRD issued its Issues Paper reaching the interim view that Bodies Corporate are liable to register in May last year.  It has remained silent for 13 months.  Then the government issues a press statement after all this time. 

Robin Oliver and Mike Shaw are principles of OliverShaw. More information is available on their website.