This article is an opinion piece by Breccan McLeod-Lundy, Co-Chair of NZRise and CEO of Ackama Limited. 

While the article is Breccan’s opinion he endeavours to reflect the discussions of NZRise members during COVID lockdown in Aotearoa and as we navigate through this ever changing economic climate of the global COVID economy. One area of contention within the NZRise community is that of taxation. 

The ideas proposed in this article are not necessarily the position of NZRise – instead are designed to stimulate discussion. This article has been released as a 4 part series or is available for download as a single PDF.  Or you can read Part 1 here.

If you would like to join this kōrero please reply to this post or email [email protected] .

Supporting the Future of NZ Businesses

Tax Settings to Support Business Growth

Tax settings should support businesses that continue to invest in New Zealand and create New Zealand based jobs. That means favouring taxes that trigger when cash is removed from businesses rather than taxing the day to day running of a business. For example, favouring personal income taxes on high earners over company income taxes or wealth taxes. 

For an illustration of why this is important, look at the surprise from many commentators when it came to how quickly small businesses found themselves short of cash under Covid-19. Part of the reason for this is if you have a growing business you could either build up your cash reserve and then hire additional staff or just hire additional staff immediately. High company income tax is a disincentive to building up healthy cash reserves as you’ll have to pay tax immediately on the “profits” while pouring the money immediately back into more staff won’t be realised as a profit. 

This graph shows the difference in employee count after  20 quarters or 5 years between a small services business that decides to only hire employees once it has 90 days of cash reserves to meet in a company tax versus no company tax environment (assuming that an employee costs about $100,000 a year and generates $120,000 revenue and the business starts with $10,000 and a founder that works until there is enough cash to start hiring).

This means that the effect of paying company tax is the difference between a small business with 4 employees and a business with 10 – a sizable difference in overall business and tax take. While the smaller business will have generated an extra $43,000 in company profit tax, the company that could accrue capital without paying it out in tax will have created jobs with a minimum income tax component $217,000 higher than the smaller business.  These are also both good businesses in that they’re holding responsible amounts of cash to cover downturns and providing high-paying jobs. For an even more extreme example a business modeled on the same assumptions that keeps winning work but decides to hire as soon as it can cover the next salary rather than holding a cash reserve could theoretically reach 400 employees in the same time frame, although a stiff breeze would put it at risk of falling over. (Note: Singapore achieves a similar outcome by issuing a plethora of tax credits to growth businesses rather than a blanket allowance.)

This isn’t an argument against tax but an argument that we should target taxes at money moving out of the business(whether to a shareholder or to an offshore parent)  rather than at cash being used to grow the business.  Better taxes include: personal income tax, fringe benefit taxes, dividend taxes, and capital gains taxes. All of which time the taxation to the point that the funds are being taken out of the business and no longer being used for growth.

Making early phases of starting a business more efficient is also a key component of making business more equitable. As those from more privileged backgrounds are more likely to receive an early investment of “friends and family” capital while those from less privileged backgrounds must slog it out until they reach the investment criteria of external investors or qualify for debt finance.

Employee Share Schemes

Employee share schemes are great for spreading the eventual benefits of success in a business around more people as well as giving employees some extra insight into the business through shareholder rights. In cases where a business becomes extremely successful, they also help create a community of people who become active in supporting other businesses and investing. A very successful business making one person a billionaire seems a lot worse for New Zealand than the same business making 100 people have 10 million dollars as the second one will lead to a much more diverse set of follow on investments and choices being made. 

Unfortunately, New Zealand has done a disappointing job of employee share schemes as apart from a small $5,000 dollar a year carve out employees will be taxed on an employee share scheme when they are issued shares. Which might sound okay except that startup shares are generally illiquid (no one will actually buy them from you) and extremely volatile in value (they could go up a lot but they also have a greater than 50% chance of being worth $0). By taxing at issue we disincentivise using stock as a significant portion of employee compensation which misses a splendid opportunity to spread risk and reward across businesses. In comparison, in the US, where people talk about the high salaries of software engineers, companies like google are often paying 40% of those packages in company stock rather than cash. 

Government Procurement

Government is a key client of many NZ businesses and a careful approach to procurement can deliver better outcomes for all of New Zealand in terms of both better outcomes and secondary economic effects of funneling money back into the local economy. Unfortunately, New Zealand has traditionally feared being seen to favour bids from New Zealand businesses on the basis that it might run afoul of trade deals. This is cowardice and contrary to what most countries do, in terms of local purchasing preferences. 

The Labour Government has introduced minor changes to the rules of sourcing in this term, many lack teeth and as a sector we are yet to see the resulting changes in capability or behaviour from government agencies as buyers. 

Many countries have succeeded with strategies to make sure work paid for by the government benefits the local economy as much as possible without running afoul of trade laws. Common provisions in other countries provisions include:

• Weighting economic benefits, particularly local employment, as an outcome of a project.

• Structuring projects in a way appealing to local businesses. Such as building a smaller solution that is exactly what the problem needs rather than buying a large generic solution, or breaking a problem up into smaller pieces that suit local providers but multinationals might consider “too small”.

• Requirements for involvement with local indigenous peoples.

• Requiring high levels of staff availability both during the project and for support afterwards.

• Tax compliance and regulation so that businesses are incentivized to employ locally or have to payout a larger portion of their earnings back to the government in tax.

• Encouraging the capture or sharing of new intellectual property generated through a project either through open source licensing or by requiring local ownership (this can include a multinational’s local office owning the IP but making it clear that in that case they’re expected to pay tax in the country where the IP was developed based on fees it might generate or the revenue generated by “selling” it back to the parent).

~ Breccan.

This article is an opinion piece by Breccan McLeod-Lundy, Co-Chair of NZRise and CEO of Ackama Limited. 

While the article is Breccan’s opinion he endeavours to reflect the discussions of NZRise members during COVID lockdown in Aotearoa and as we navigate through this ever changing economic climate of the global COVID economy. One area of contention within the NZRise community is that of taxation. 

The ideas proposed in this article are not necessarily the position of NZRise – instead are designed to stimulate discussion. This article has been released as a 4 part series or is available for download as a single PDF.  Or you can read Part 1 here.

If you would like to join this kōrero please reply to this post or email [email protected] .