Tax Working Group – What Matters for Manufacturers?

13 April 2018

The Government’s Tax Working Group is currently receiving submissions before the group provides an initial report.  It is critical that manufacturers have their say in this working group to ensure tax settings can be improved to facilitate productive investment and growth in the manufacturing sector.  If Labour remain in Government following the next election, this Tax Working group will likely inform tax changes they will implement.

The Manufacturers’ Network is providing a submission to the Tax Working Group and we want to hear you views – the discussion document can be found here, and please send any feedback or submission to kieran@themanufacturersnetwork.org.nz.

The discussion document poses a number of questions, many of which are broad and concerned with the aims and outcomes of the tax system, as well as how we deal with future demographic and technology changes which will impact the tax base.

The report shows a graph of company tax rates since 1981, which have been trending downward over this period – New Zealand sits above the OECD average company tax, but below that of Australia. Our aging population is expected to put pressure on the tax base into the future, increasing Government costs in areas like health and superannuation.  A later graph, shows that while New Zealand’s corporate tax rate is around the middle of the pack, our company income tax revenue as a percentage of GDP is the highest in the OECD.

From our perspective, the core issue this Tax Working Group needs to consider is what measures are needed to create a tax system which facilities productive growth and investment in our economy. This needs to especially focus on high-value activities which provide exports and import-competing income and well paid jobs, like manufacturing.  Productivity in New Zealand has lagged for decades and all manufacturers know the challenges involved in trying to access capital for investment in their businesses.

One of the most obvious and most significant areas of misalignment in our tax system is that while productive activities are taxed in the form of wages and profits, speculative activities are largely untaxed. The test for what’s a speculative activity is quite simple – it’s an investment where the operational returns alone wouldn’t be enough to justify the investment. (Auckland) rental properties and many dairy farms are prime examples for that. What that means is that the vast majority of capital and new money through bank loans goes into existing assets – which not only crowds out productive investment, but has other social implications, such as the house price inflation we have seen over recent decades.

There is a lot of discussion around how exactly this imbalance could be addressed. From our perspective, the challenge is finding the most effective and efficient way to do so, helping to direct our economy towards more productive investment while still meeting the housing needs of the growing population, particularly in Auckland.  Whatever changes are made, these need to work with a wider Government strategy to move our economy toward high value, productive activities. 

There are other tax changes that would help Kiwi manufacturers and others businesses keep up with changing technology and improve productivity through innovation.  One such change would be the reintroduction of accelerated depreciation for equipment. Accelerated depreciation is an effective way of making investment in new equipment easier for businesses, while remaining largely tax neutral.  It would also better reflect the true life time of equipment and machinery, in a time when keeping up with technology is ever more necessary.   

In addition, R&D tax credits, which we are already expecting from the current Government, can help improve accessibility of support for innovation.  To be effective, these credits also need to take into account process, as well as product innovation.  Process innovation is often the most important factor allowing Kiwi manufacturers to stay competitive and will help us further increase productivity.  A lot of the time, it’s about finding a smarter way of making a product that brings the greatest gains, rather than creating a new product.

There have been Tax Working Groups before, and previously, many of the recommendations have been ignored by Governments. This time, we hope the Working Group can have a quality discussion and analysis on better aligning our economy, through the tax system, to support productive investment which can grow our economy, and that the Government listens.