Australia: screaming backwards with CGT

Written By: - Date published: 1:51 pm, July 13th, 2011 - 57 comments
Categories: brand key, capital gains, Economy, making shit up, russel norman - Tags:

Russel Norman put a dagger into John Key yesterday in question time asking whether a series of national and international economic authorities really wanted to “put a dagger through the heart of growth” with a CGT.

Key waffled and whined and contradicted himself: ‘it won’t raise any money’, ‘it’s a tax grab’, ‘it’ll send the economy backwards’, ‘everyone will avoid it’, ‘it’s hideously complex’, ‘we already have one’, ‘it won’t solve the problem’, ‘we already basically did this and fixed the problem’.

But the best moment was when Norman looked at the evidence across the Tasman.

Dr Russel Norman: Has the Prime Minister seen the evidence that the Australian economy has outperformed the New Zealand economy every year since 1985, the same year that Australia first introduced a capital gains tax, which would supposedly put a dagger through the economy?

Rt Hon JOHN KEY: There are many differences between the New Zealand and Australian economies…. (followed by over a minute of increasingly hysterical non sequiturs)

So, is Norman right? Not precisely, New Zealand grew faster than Australia a couple of times,  but the Australian economy vastly outstripped New Zealand’s overall, growing 58% per capita since 1985 compared to New Zealand’s 28%. It was after CGT was introduced there, and the neoliberal reforms took hold here, that the gap really opened up.

And it’s clear that did not go “screaming backwards” when CGT was introduced, as Key would have you believe:

Australia’s growth per capita has averaged 0.5% per quarter since CGT came in compared to 0.4% before had as far back as records go.

I don’t know about you, but if CGT is a dagger through the heart, I would prefer it to slow starvation via neglect from Key and co.

– Bright Red

57 comments on “Australia: screaming backwards with CGT”

  1. freedom 1

    ( sardonic tone ) hate to point out the obvious but NZ is not on that graph so how is the all important visual comparison meant to be made? We know it is true because all data supports the facts, but the RWNJ brigade will cry foul that the post is confusing and murray already has a headache from all the whistling

  2. queenstfarmer 2

    My take on Key’s claims:

    ‘it won’t raise any money’ – partially true. Indications are it will raise close to a billion, after about a decade. In the short term (next few years) it won’t raise much.

    ‘it’s a tax grab’ – it’s a tax increase, that’s for certain, though it won’t be felt immediately.

    ‘it’ll send the economy backwards’ – probably false (i.e. unlikely), but unknown.

    ‘everyone will avoid it’ – partially true. People will try to avoid it, and wealther people tend to (legally) avoid tax much more than others.

    ‘it’s hideously complex’ – compared to other taxes, true.

    ‘we already have one’ – true, but it’s a bit kneecapped.

    ‘it won’t solve the problem’ – true, if the problem is how does Labour propose to fund extravagent spending promises.

    • Colonial Viper 2.1

      ‘it’s hideously complex’ – compared to other taxes, true.

      Not compared to the earnings from foreign investments regime mate. Not one bit as complex.

      • Jim Nald 2.1.1

        Complex? Difficult? The sky will fall?

        On the eve of Labour’s tax policy announcement, I am relaxed.

        I have, just this afternoon, scheduled an appointment with my bank about my plans in the next few months to buy another house.

        I am working out my own finances and long term plans, and come what may with Labour’s policy, I will be comfortable.

    • Reality Bytes 2.2

      Sure It may take a decade to raise a billion annually by some forecasts.

      BUT…

      What about the capital that gets redirected into other productive areas like business investment, as more investors shy away from property speculation. What about the increased tax revenue due to that?

      The decreased social welfare costs from the knock on effect of greater available employment opportunities…

      And from that the increased tax revenue from PAYE due to the greater number of people employed…

      And from that the increased tax revenue from GST due to a greater number employed having greater disposable income…

      And increased tax revenue from businesses that would not exist if the capital was tied up in over-priced property speculation…

      And all of the above repeated as more people with more disposable income have more potential to invest.

      Oh and more reasonably priced housing, meaning less of a brain-drain, as less people jump the ditch to Aussie.

      The direct tax take from the CGT is just the icing on the cake, I suspect the benefits from all of the above mentioned would be far far greater than the basic amount that CGT would bring in.

      • queenstfarmer 2.2.1

        That is possible – and actually why I am cautiously in favour of a limited CGT – although note that the Aussie graph above didn’t take off after CGT, as well as not going down. So it is far from clear whether it would boost the economy (though again I like the rationale)

  3. davidc 3

    Why compare ourselves to Oz? They are more than a little different to lil ole NZ. 57% of what they export comes out of a hole in the ground, and frankly who cares? nice place to visit but wouldnt wanna live there!

    • Blighty 3.1

      are you saying that mining is the reason why cgt didn’t send Australia ‘screaming backwards’?

      Please explain how.

      • davidc 3.1.1

        Record earning thru mining so the export earnings are fantastic and the service industries that support mining are coining it all keeps gdp boyant, but really my point was that its not an apples to apples comparison.

        • Blighty 3.1.1.1

          um. are you claiming that Australia was going through a mining boom in the mid 80s and that was all that stopped Australia from going ‘screaming backwards’ due to the introduction of CGT?

          • davidc 3.1.1.1.1

            Yip 🙂

            Remembering that CGT takes a long time to get into gear and by the time it did the mining boom was well underway.

            • Blighty 3.1.1.1.1.1

              that’s retarded.

              you have no evidence. You just want something, anything, up to avoid the clear facts that CGT didn’t hurt the Australian economy

              • Colonial Viper

                Australia wasn’t hurt by the CGT not because of the mining which is merely a confounding factor, but because large deserts make countries less susceptible to the negative economic affects of a CGT. And Australia has plenty of those.

                Aussie Rules also plays a part as that changes the social dynamics of the society, which studies have shown reduce the potential negative effects of a CGT.

                New Zealand, absent these protective factors, is definitely at heightened risk from going backwards so Key is right.

            • Robert M 3.1.1.1.1.2

              This is part of the truth, but Australia is a vastly wealthier country. The rich list people in Australia are ten times wealthier than their compatriots in NZ. Education and health are vastly more private domains in Australia. Half the school age population in Australia goes to private schools. \Much of the Australian middle class will draw the majority of their income from shares, inheritance and company and business ownership. That isn’t remotely the case here. Australias reliance on mineral wealth may be regarded as an exception-but it is also true that NZ excessively relies on agricultural industries which have largely reached their sustainable limit. \Investment of new tech in agriculture will not necessarily produce great medium term gains. CGT is another tax on the bright and the professional classes. It will be a furthur barrier to keeping talent in the country. It is a tax born of ignorance, cynicism and envy.

              • Colonial Viper

                CGT is another tax on the bright and the professional classes. It will be a furthur barrier to keeping talent in the country. It is a tax born of ignorance, cynicism and envy.

                Singing for your supper on behalf of the top 5% of NZ society eh? Or is that the top 1%?

                US style tax welfare for the wealthy is wrecking their country and it isn’t welcome here. The chant of the Republican Party is simple: tax cuts for the rich, service cuts for the poor!!!

                It will be a furthur barrier to keeping talent in the country.

                Actually I am hoping that all the speculators and ticket clippers will go and we can get on with building a properly productive NZ.

        • mik e 3.1.1.2

          AUS also introduced the compulsory super scheme around that time as well.now they have$1.4trilion in savings no wonder Australia hasn,t had a recession since 1980 while we,ve had 6 most of them on nationals watch only one on Labours , in fact National have only managed to get 9.5% economic growth by volume in 12years Labour manged 28% in 9 years !

          • Jim Nald 3.1.1.2.1

            NZ could have come out much better now if our super wasn’t killed?

            Brian Gaynor’s pieces:

            http://www.nzherald.co.nz/super-fund/news/article.cfm?c_id=468&objectid=10465138

            http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10667652

            “A dreadful political decision, announced on December 15, 1975, transformed New Zealand from the potential Switzerland of the Southern Hemisphere into a low-ranking OECD economy.

            “Without this decision we would now be called “The Antipodean Tiger” and be the envy of the rest of the world. We would have a current account surplus, one of the lowest interest-rate structures in the world and would probably rank as one of the top five OECD economies.

            ….

            “The irony is that we once had a fantastic superannuation scheme which was terminated by Prime Minister Robert Muldoon on December 15, 1975.

            “This was the worst economic decision by any New Zealand government in the past 50 years and turned the country from being a potential Switzerland of the Southern Hemisphere into a low-ranking OECD country that is falling further and further behind its next-door neighbour.”

  4. Herodotus 4

    Key waffled and whined and contradicted himself: ‘it won’t raise any money’, ‘it’s a tax grab’, ‘it’ll send the economy backwards’, ‘everyone will avoid it’,
    There is already a CGT it was just that the IRD and various govts decided for what ever reasons not to enforce the legislation and interpretations at the time. I am sure we all know of examples where individuals were trading in property and not contributing their fair share to society, and from this insightful link !!!
    http://www.national.org.nz/Article.aspx?articleId=9733
    For example, in 2004, IRD targeted property investment in Queenstown, Wanaka and some parts of Auckland. They gathered an extra $106.6 million in tax from those investigations, including $52.9 million from Auckland alone.
    So I would love to ask P.Dunn, and senior members of previous govts why they did not have as a priority enforcement of this legislation ? Why was it acceptable for many to avoid paying their due taxes ? and finally what steps are in place currently to hold people accountable for taxes they owe from any previous capital gains (its not rocket science to search LINZ database for patterns of property trading)?

    • davidc 4.1

      Herodotus, I agree.
      There is a vast black ecconomy that could be taxed if IRD got of its arse.
      Typical scenario is the self employed builder/plumber/sparkie who builds or tarts up a house using materials that have been purchased thru his company and written off on other jobs so not only does he not pay income tax on the materials he claims the GST and then gets a tax free profit on the house when its sold.
      Enforcement is the answer not renaming the tax.

      • Colonial Viper 4.1.1

        Need a wealth tax of around 0.5% p.a.

        • sean maitland 4.1.1.1

          All you envious little lefties, jealous with rage, wanting to grab other peoples money and get your filthy little bludging paws all over it……

          • rosy 4.1.1.1.1

            You think? I’m one of many who doesn’t need anyone else’s money, but I do think broadening the tax base, including a CGT is a really good idea. A few very rich people around the world are also thinking broadening the tax base is a really good idea. I particularly like this headline:

            German Rich Demand Higher Taxes

            You need to get with the programme Sean, being greedy is losing its cool.

    • Draco T Bastard 4.2

      There is already a CGT it was just that the IRD and various govts decided for what ever reasons not to enforce the legislation and interpretations at the time.

      No, it’s that the rules around it are so amorphous as to be impractical to apply. They have to work at it proving every single case which would mean that, if it was applied across the board, it would most likely cost more to administer than it could possibly collect.

      • Herodotus 4.2.1

        DTB I would question
        They have to work at it proving every single case which would mean that, if it was applied across the board, it would most likely cost more to administer than it could possibly collect.
        As when the IRD took individuakls to court and were sucessful a history of precedent would build up. Sure there would be some who would escape, this would have reduced the necessity for a CGT as much of whatthis may collect would already have been collected !!!!!!
        – yet those who assigned a Sales & Purchase comtract to a 3rd party and took a gain would find it difficult to argue that there was an element of non speculation, also those who traded property 3,4 5+ or more properties over say a 6 yr period, and there were many in this boat. For this it should have been the easily picked fruit thatthe IRD went after, instead of NO FRUIT !!!
        With my limited knowledge I would be surprised it over the 5th Lab govts tenor I could not have collected 100+ million p.a.
        Perhaps the CGT is Phils/labs conscience acting up over what previous govts were entitle to and failed to collect.

        • Draco T Bastard 4.2.1.1

          Perhaps they could have but why not make it easier and cheaper to do so?

  5. freedom 5

    There’s a vast in your face economy too and only a fraction of the Tax debt has been paid

    All the major banks and so many other Multinationals have regularly had extensions for hundreds of millions in tax and you want to thumbscrew the chippies and the house cleaners
    http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10601998

  6. Herodotus 6

    I am aware of many builders who “lost” materials when building their own home/bach on other projects. This allowed them to min the cost of their home (max the capital gain) and to claim as deductions for coy tax and GST on the business (saving over 40% in materials costs 12.5% GST and the 33% on the 87.5% on materials).
    It was a standing joke that whenever a builder built a pool for himself there was also 1 being constructed for a client-funny how many pools required 2 filter pumps, extra concrete and pool fencing, and how is the IRD to know who is a builder when as an occupation they entered Company Director?
    I had at the pub one night the priviledge of listening to a builder complain how hard it was for him to lose a $70k cash job and for the IRD not to know. How some are so unfortunate 😉

    • davidc 6.1

      On your ACC paperwork you have to say what you do, that shouldnt be too hard for IRD to work out.

      Also shouldnt be too hard to line up company directors names/company names and vendors on LINZ or RPNZ that keep popping up. If company sells houses and same director sells houses then director should be audited!
      Also spot audits on companies would turn up all sorts. I was in construction for nearly 20 years and never once audited, but I course I was clean anyways!
      I had read but I cant remember where that for every dollar expended by IRD on audit they bring in $8.

    • Ianupnorth 6.2

      People laugh or go into denial when I tell them I know of a 25m long salt water lap pool built as a ‘fire dam’ on a BOP dairy farm, and a Bijon Frise that has its food and vet bills claimed as business expenses as it ‘catches rodents’.
       

  7. Ianupnorth 7

    BTW, how do you put a dagger into growth when there isn’t any?

  8. RedLogix 8

    I have to agree Herodotus; the real failure lay with the govt in the 90’s which according to my own accountant, who is himself ex-IRD, deliberately directed IRD not to put much resource into enforcing this aspect of tax law.

    I’ve said this before… almost all of the effect of a CGT tax would be achieved simply by properly enforcing the existing tax law.

    Now I do know that it took the 5th Labour govt some years to gain an appreciation of what was going on. It was as late as 2005 before Dr Cullen directed IRD to beef up it’s resources in this area and immediately on doing so started finding all amounts of avoided tax.

    And that on gaining office one of this National govt’s first priorities has been stripping that same resource out of IRD.

    And the existing law is not actually all that ill-defined. The current rules are actually quite clear and difficult to avoid.

    I’m not so much against a CGT, after all I’m quite comfortable with the current rules which I believe amount to much the same thing, I’m just underwhelmed by it all.

    • Colonial Viper 8.1

      I’m not so much against a CGT, after all I’m quite comfortable with the current rules which I believe amount to much the same thing, I’m just underwhelmed by it all.

      Its just a start mate. Rest of the package comes out tomorrow. Asset taxes and capital/currency controls are needed as well.

    • wtl 8.2

      Your comment suggests that one of the main problems with the current law is that enforcement is dependent on the whims of the government of the day. On that basis, a change to the law, as Labour is proposing, would help overcome this problem – any future government would have to repeal the new law, making their intent plain for all to see, rather than the current rather nebulous approach of turning a blind eye.

      • RedLogix 8.2.1

        any future government would have to repeal the new law, making their intent plain for all to see, rather than the current rather nebulous approach of turning a blind eye.

        Yes.. that’s not a bad point. But then again while I can accept a CGT rule would perhaps work better from an avoidance point of view, you have to recall that the current rule pings the entire capital gain at the applicable marginal tax rate, usually 33%… while Labour’s proposed policy is only rated at 15%.

        Worse still because the ‘grandfathering’ date would 2012 at the earliest, it would effectively give a free pass to huge amounts of capital gain accumulated over the last decade.

        The other thing that generally concerns me about these kinds of rules is that they penalise improvements. In other words if I do the place up, and pay for it out of my own tax paid income… then if I sell the asset for a gain… then I effectively pay tax on the value of the improvements a second time.

        The other effect often seen in other countries is that the small mum and dad rental investors are slowly but surely pushed out of the market, which is gradually concentrated into the hands of a few relatively few very large landlords.

        Combine these two effects and I wonder if it isn’t a bit a recipie for slum-landording. Just thinking..

        • Colonial Viper 8.2.1.1

          The other thing that generally concerns me about these kinds of rules is that they penalise improvements. In other words if I do the place up, and pay for it out of my own tax paid income… then if I sell the asset for a gain… then I effectively pay tax on the value of the improvements a second time.

          Let’s say an investment in improvements of $10,000 secures a capital gain of $5,000 at sale a couple of years later.

          That investment has just returned you $5000 beyond the capital you originally put in.

          It appears to me that $5000 investment gain should be taxed, just like it would have been if you had received it as dividends, interest payments or wages (albeit at different rates).

          The other effect often seen in other countries is that the small mum and dad rental investors are slowly but surely pushed out of the market

          Why would this concentration occur? Currently we have an effect where younger New Zealanders are unable to afford houses at current prices, but a small number of New Zealanders can afford several.

          Combine these two effects and I wonder if it isn’t a bit a recipie for slum-landording. Just thinking..

          There are a few student flat districts I am aware of which isn’t too far off this.

          • Herodotus 8.2.1.1.1

            Come tomorow I hope that Lab (D.Cunliffe) has filled in the small print.

            There to me appears that there will be plenty of scope for the gains that have accumulated over the years to be lost for all time. It would be great to read that in association with any (rumoured) CGT that the IRD will be able to retrospectively review past trading activities pre 2005 (7 yrs previous from this years election). So to be fair those that have profited from marginal activity in the past will also be caught (using the existing legislation and extending to cover more than 7 yrs).

            I have yet to hear of any investigations into share trading and tax being applied to this activity.

            The other aspect I have yet to hear is how the govt will be able to serve a tax notice on non-residents, as if the tax is payable based on the tax year, profits that have been obtained how will these be collected. As the basis for withholding tax is to receipt payment at source so should there be flight the govt has already received payment, how will this be captured with a CGT? I have not read how other countries overcome this, and it was previlent in 04-07.

            • Colonial Viper 8.2.1.1.1.1

              There to me appears that there will be plenty of scope for the gains that have accumulated over the years to be lost for all time.

              What gains? Its worth taking stock here.

              Virtually every dollar of “gains” in the property market was backed my another dollar of mortgage debt.

              • Herodotus

                The gains I am referring to are those whereby property was purchased in the 01-04 period whereby the greatest gains were achieved, and even with the current depressed market there are still capital gains that have not been realised.
                The background effort that Lab has placed will be evident by tomorrows announcement. If it is well planned with detail or if it is just chasing headlines with little detail, just like the 39% tax rate and all the loopholes that were allowed that resulted for many to divert income and pay lower tax rates.
                Knowing the number of non resident Kiwis in 2 areas in Auckland that have traded in property I am worried that they will escape this tax, as they will not appear in any tax records. just lik ethe current tax that allows GST registered to purchaes land GSt excl. Now I wonder how many people have a made upGSt no?

            • Lanthanide 8.2.1.1.1.2

              “It would be great to read that in association with any (rumoured) CGT that the IRD will be able to retrospectively review past trading activities pre 2005 (7 yrs previous from this years election).”

              Electoral suicide if declared before the election.

              But you are advised to keep tax records for 7 years, so all of these people currently evading tax don’t really have any excuse if they’re audited.

          • RedLogix 8.2.1.1.2

            @CV

            It appears to me that $5000 investment gain should be taxed, just like it would have been if you had received it as dividends, interest payments or wages (albeit at different rates).

            I’m not sure the numbers you give work out the way you intended.

            If I had invested say $10,000 in a bank account and then close the account at the end of the year (the equivalent of selling)… you expect the say $400 interest earned to be counted as income and therefore taxable. But you’d be outraged if the taxman counted the entire $10,400 as income and taxed you 33% on the whole amount.

            So if I have spent the same $10k (from tax paid income) adding improvements to a property (maybe even just my own labour), and it gained an extra $15k on resale as a result… I’d happily pay tax on the $5k surplus… but the whole $15k would be a different matter would it not?

            So what was my ‘capital gain’ again?

            Why would this concentration occur? Currently we have an effect where younger New Zealanders are unable to afford houses at current prices, but a small number of New Zealanders can afford several.

            Well it does seem to be the experience in some overseas countries I can think of. For example in Scotland IIRC some 90% of the houses are owned by less than 4% of the population. Landlords owning 10,000’s of houses for generations are commonplace.

            If you make landlording unattractive for ordinary investors the residential rental market might shrink somewhat (but never drop below I’d guess 25% of homes) it would likely be taken up by large cashed up entities via the usual processes of capitalism.

        • Lanthanide 8.2.1.2

          “Yes.. that’s not a bad point. But then again while I can accept a CGT rule would perhaps work better from an avoidance point of view, you have to recall that the current rule pings the entire capital gain at the applicable marginal tax rate, usually 33%… while Labour’s proposed policy is only rated at 15%.

          Worse still because the ‘grandfathering’ date would 2012 at the earliest, it would effectively give a free pass to huge amounts of capital gain accumulated over the last decade.”

          I don’t believe Labour’s new law is going to replace the existing one. It simply means if you are buying deliberately for a capital gain and no other purpose, you should have the gain taxed as income. If you aren’t buying deliberately for capital gain, you’ll just pay the 15%.

          Therefore, the grandfathering law isn’t going to stop people who bought properties deliberately for the capital gains for having to declare that as income. I guess it’s possible that IRD may ease off on their collections and prosecutions in this area once the new law is passed, though.

        • mikesh 8.2.1.3

          A similar sort of thing occurs with shares when profits are retained, since retained earnings would normally be expected to cause an increase in the share price. But even though the company has already paid tax on those earnings, a shareholder selling subsequently will have to pay CGT, so the earnings end up being taxed twice.

    • Draco T Bastard 8.3

      And the existing law is not actually all that ill-defined.

      Apparently, as reported on here a few days ago, Treasury and the IRD disagree with you.

  9. alex 9

    Dr Norman should be made finance minister if Labour win, after all, Labour are mining Green policies pretty heavily.

    • Reality Bytes 9.1

      For sure.

      If greens are the kingmaker’s, it’s a virtual certainty. And Norman/Metiria being co-deputy prime-ministers will be part of the deal.

      • felix 9.1.1

        Are you both high?

        • Reality Bytes 9.1.1.1

          “If” is a conjunction that can introduce a conditional clause.

          http://en.wikipedia.org/wiki/Conditional_clause

          IF Greens are the kingmakers, you CAN GUARANTEE Key will be offering them co-deputy prime ministerships, and the Greens will get the same offer from Labour.

          Governments say we won’t work with this or that party, but speeches or promises are not the same thing as actual power. They will quickly change their tune and backtrack on said promises, arguing we had to change or mind because it’s important for the country we are in power etc…

          Exactly the same as Goff will work with Mana even though he says he won’t.

          No I am not high, thanks for asking. Interesting segway, but please try to keep on topic.

          • felix 9.1.1.1.1

            Maybe if you got high you wouldn’t be so patronising. Give it a go.

            What you’re suggesting is of course possible but would represent a major break with convention which wouldn’t be undertaken on a whim if at all.

            For post election negotiations to result in such an outcome, at least one of the two larger parties would need to be willing to countenance such an unprecedented governing arrangement. Possible, but if neither are then no dice.

            Therefore there’s no such guarantee anyone can make.

            Contrary to what’s often thrown around in these discussions, being in a “kingmaker” position doesn’t mean you get whatever you want. It means you get whatever the “kings” are willing to give up.

            • Reality Bytes 9.1.1.1.1.1

              Mate, I think getting accused of having an opinion for merely being high, to be patronizing, hence my response, so what goes around comes around. But I laugh it off and give a bit of quid pro quo patronizing response myself, no offense intended, just a bit of friendly dueling 🙂

              But back to the topic, I agree, being a Kingmaker doesn’t guarantee anything, but boy does it make a difference! It all comes down to how much balls/ovaries the theoretical kingmaker has.

          • Lanthanide 9.1.1.1.2

            “Exactly the same as Goff will work with Mana even though he says he won’t.”

            Not really, because Mana will NEVER go with National. The only situation in which Labour need to actively deal with Mana is the case where, without Mana, Labour is beaten by a repeat of the current government makeup: Nat + Act + MP + UF. Such an outcome as this is quite unlikely, because you could flip MP over to Labour’s side and therefore not need Mana.

  10. Georgecom 10

    Nice stuff from Norman using Keys comments over and over again to expose the hysteria that Key tried to inject into the debate. A nice clinical disection of the prime Minister. Basically Key was done over with his own words. Also nice interjection by Cunliffe that Key may want to try quoting McBeth.

  11. alex 11

    All I’m saying Felix is that Dr Norman has the chops as an economist, I’m not saying that the Greens will be offered high cabinet positions, after all, they continually get shafted by Labour, and the membership would never accept supporting National.
    But seriously, a strong Green party would do wonders for both the quality of policy produced by Parliament and the quality of debate. They play the ball, not the man.

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