Long-term insights breifing

In June last year Inland Revenue (IR) issued a consultation draft of its Long-Term Insights Briefing, titled ‘Stable bases and flexible rates: New Zealand’s tax system’ (the LTIB).

A Long-Term Insights Briefing is a forward-looking paper that examines an issue likely to significantly affect New Zealand’s tax system or revenue base over the long term. It analyses trends, risks and uncertainties to assess implications for tax sustainability and administration, without proposing specific policy changes. The purpose is to inform Parliament and the public, and to stimulate discussion about future challenges facing the revenue system. 

IR is statutorily required under the Public Service Act 2020 to prepare an LTIB every 3 years (independent of Ministers). However this requirement will be removed under a Bill currently before Parliament.^[1] Therefore, this is likely to be the final LTIB published by IR, which would be unfortunate given the valuable contribution these briefings have made to addressing longer-term challenges facing New Zealand’s tax system.

The last LTIB, ‘Tax, foreign investment and productivity’, focused on how New Zealand might attract foreign direct investment with via accelerated depreciation and thin capitalisation reforms, models which we have seen come to the forefront with Investment Boost and thin capitalisation for infrastructure reforms as part of Budget 2025.

The latest LTIB focuses on the fiscal pressures New Zealand faces from an ageing population and how the tax system may need to adapt to generate sufficient revenue to reflect changing demographic proportions. In particular, the LTIB notes that the proportion of New Zealand’s population aged 65 or over is projected to increase to 25% by the late 2050s, with the net tax cost of New Zealand Superannuation and projected health expenditure making up 17% of GDP by 2061, compared to around 12% in the 2024/25 year.

The LTIB does not take a view on the amount of tax revenue that New Zealand needs to fund future expenditure. Rather, it considers options to make New Zealand’s tax system more resilient and adaptable to changing revenue needs over time. Revenue can be raised by introducing new tax bases (for example, taxes on capital income) or by retaining flexibility to increase revenue through adjustments to tax rates.

As the topic of the last LTIB shaped some of the tax policy developments we have seen over the past three years, it is possible that the ideas in this LTIB will come under discussion as we head into the 2026 election cycle.

The LTIB considers four key proposals: further integration of company and shareholder taxation; a dual income tax (DIT), which would tax above-normal returns of capital; changes to GST; and the option of adding additional bases to New Zealand’s tax system.

In this Tax Tips, we discuss these proposals further. It will be interesting to see what changes are made to the final LTIB when it is released.

Company Shareholder Integration

Under New Zealand’s tax system, companies are subject to tax at the single corporate rate of 28%, while individual shareholders are subject to tax at their (typically higher) marginal rates. The LTIB proposes refined integration between company and shareholder taxation to reduce the disparity in effective tax rates on labour and capital income. Specific options presented in the LTIB include mandatory flow-through treatment for closely held companies, incentives for more frequent dividend payments, and deeming certain realisation events as taxable. These options are explained below:

• Mandatory flow-through would function similarly to partnerships or sole proprietorships, where the company profits are not taxed at the company level but instead flow through as taxable income or loss to the shareholder, with the shareholder’s marginal rates applying. The LTIB notes that such a scheme is common on an opt-in basis in the United States (US), where income and losses of a ‘C corporation’ pass through to the owners’ personal income.
• Incentives for dividend payments could include an accumulated earnings tax on earnings above a set amount over a set period, and a surtax on passive earnings. 
• Deemed realisation events would be used to temper the use of corporate structures to defer taxation. One example provided is taxing shares on sale. While this would tax the realisation of value from accumulated company income, it would also result in double taxation of the portion representing retained earnings. 

PwC view

The proposals outlined above each entail their own technical complexities and practical imperfections. A major concern is the impact these proposals could have on the relative competitiveness of New Zealand businesses if their growth is impeded by a tax on accumulated earnings.

Full integration by way of flow-through should, in our view, only be considered on an opt-in basis, and should be aligned, where possible, with the treatment of Portfolio Investment Entities to streamline impacts on taxpayers.

Further, the accumulated earnings tax identified would be a complex, arbitrary and incomplete proxy for the deferral of dividend payments, as recognised in the LTIB itself. In addition, in our view it would unnecessarily impede the accumulation of profits for valid commercial reasons such as funding business growth.

Lastly, a comprehensive application of the proposal to treat certain realisation events as taxable would effectively require adoption of the Norwegian DIT model which involves its own significant complexities, as discussed below.

Norwegian Dual Income Tax

The LTIB includes a description of a DIT system, which separates the taxation of labour and capital. The Norwegian DIT is modelled on taxing normal returns^[2] at a lower rate, while taxing labour income and economic rents^[3] at higher rates. It uses a ‘risk-free-return shield’ which offsets double taxation by allowing a deduction for a normal return, similar in concept to how imputation credits prevent double taxation. The LTIB includes a helpful illustrative example referencing Norwegian rates summarised below:

PwC View: 

We acknowledge the structural and economic strengths of DIT but note the conceptual and practical difficulties. The relative complexity and scale of change would make it difficult to gain acceptance from the wider New Zealand public.

Consideration would also need to be given to the services the Government delivers to New Zealanders relative to the level of taxation. The taxation models of most Nordic countries differ markedly from New Zealand, as do taxpayer expectations regarding public services. A shift to a DIT should not be considered in isolation from the tax system alone, but as part of a broader review of Government expenditure including the level of services provided to New Zealanders.  

Viability of GST Exclusions

The LTIB briefly explores the potential for GST exemptions (or lower rates) for certain goods or services to alleviate financial burdens if the GST rate were increased to meet revenue requirements.

PwC View:

In our view, New Zealand’s comprehensive GST is a key strength of the system. Introducing exemptions for particular goods or services would create cumbersome boundary issues and is unlikely to result in full price reductions passed on to consumers as the LTIB notes.

Low-income GST Offsets

This proposal would involve increasing GST increase (for example, to 17.5%) coupled with measures to reduce the impact on low-income households.

At present, any increase in the GST rate is constrained by the regressive impact on low-income households, who generally spend a greater proportion of their income on consumption.

To counter this impact, the LTIB considers implementing a low-income GST offset scheme, whereby eligible households would receive a tax credit or cash payment intended to compensate them for the disproportionate effect of a GST increase.

PwC View:

A low-income GST offset is a preferable alternative to targeted GST exemptions, which would erode the broad base of New Zealand’s GST regime.

In our view, an income-based credit may be the most realistic option proposed, given the practical limitations in calculating the actual GST burden faced by an individual household following a rate increase.

However, a low-income offset would add complexity to the tax and transfer system for individuals receiving Working for Families, benefits or other Government entitlements. Lessons should be drawn from previous direct transfer schemes, such as the Cost of Living Payment, to ensure that any such transfers are appropriately targeted and administratively simple.

Other Additional Bases

Lastly, the LTIB explores alternative tax bases not currently in place, such as payroll taxes, wealth taxes, inheritance taxes, land taxes, and stamp duties, to diversify revenue streams.

PwC View:

Generally, these alternatives lack desirability due to administrative complexity and significant policy trade-offs.

• Payroll taxes / social security contributions – these are likely to be ineffective given their overlap with KiwiSaver and ACC levies, and may be unnecessary given the existing flexibility of income tax and GST to raise revenue.
• Wealth taxes – introduction of a wealth tax carry a high risk of capital flight, as high-net-worth individuals may choose to relocate to jurisdictions with a lower tax burden. This risk is particularly pronounced given New Zealand shares a highly mobile population with Australia which does not currently impose a wealth tax. 
• Inheritance taxes – an inheritance tax has significant potential to generate substantial additional revenue. However it would require strategic design to minimise avoidance opportunities and administrative burden. Such a tax would likely face significant public resistance and may be perceived as punitive, making this prohibitively challenging to implement.
• Land taxes – of the alternatives considered, the LTIB describes land taxes as one of the most efficient options for expanding New Zealand’s tax base, given their revenue stability, the immobility of land, and their relatively lower economic distortions compared to taxes on income or consumption. Land taxes may also improve resource allocation and reduce speculative holding. However, like inheritance taxes, they are likely to be politically unpopular and present design challenges, particularly for asset-rich but cash-poor landowners. Further consideration would also need to be given to Māori land.  
• Stamp duties – the LTIB explains, and we agree, that stamp duties have well-documented drawbacks,   including revenue volatility and negative impacts on market liquidity due to ‘lock-in’ effects and reduced mobility. For these reasons, they are generally less desirable than a land tax and do not represent a flexible or sustainable revenue source.

If there were a need to broaden New Zealand’s tax base, it would also be prudent to consider more common and well-tested international approaches such as a Capital Gains Tax (CGT), which was not canvassed in the LITB.

Conclusion

The LTIB explores a range of proposals to enhance the sustainability and flexibility of the tax system.  

Targeted measures such as a low-income GST offset are promising tools to address equity concerns without undermining the broad-based nature of New Zealand’s tax regime. By contrast, potential new tax bases face substantial administrative and political hurdles. 

While options such as enhanced company-shareholder integration, adoption of a DIT model, and adjustments to the GST system each offer potential benefits, they also carry material complexities and practical constraints that require careful consideration. 

Notwithstanding these challenges, discussion about the sustainability of New Zealand’s tax base will continue, particularly as New Zealand continues to face a structural deficit as outlined by the Treasury^[6]. Put simply, over time the amount of tax revenue collected will not be sufficient to meet Government expenditure, even when the economy is working at full capacity. While this issue may not have immediate consequences, it is important for New Zealand to consider the available policy levers, as meaningful tax changes typically take time to implement and take effect.    

Ultimately public acceptance will be critical as the political acceptability of any tax change is essential to its long-term sustainability.