Both aspects of the Big Kahuna – the unconditional basic income (UBI) and the new tax policy will affect you.
The UBI provides a basic income to every adult. So if you have a great business idea and want to take some time out to develop it, you’ll have some income to do it (it won’t be a lavish lifestyle, but nor will you be forced to attend WiNZ employment seminars!). Everyone receives the UBI so even when your business is going well, you’ll get the UBI.
The Big Kahuna includes a new tax policy. A constant, flat 30% rate is applied to all income (regardless of whether it is wage income, trust income, or company income). A second change is that an annual tax – the comprehensive capital tax or CCT – is applied to all real capital. The CCT is based on a minimum rate of return required from the capital (a rate set by government. The Big Kahuna assumes 6%). Interest costs are permitted as a deduction, and the flat 30% tax rate is applied to the balance.
The CCT is not a substitute for income tax, but is integrated within a general framework of taxing capital income, a framework that is similar to what we use today. Business taxable income continues to be calculated in the same way (the same accounting standards and deductions apply) with the one exception that the required minimum return is deducted from income (actual EBIT) to avoid double taxation (if in the event interest expenses exceed the required minimum return, the interest balance can be deducted from EBIT also).
If you own a business that generates an annual EBIT (‘earnings before interest and tax) equal to 6% or more relative to the value of non-current assets, you’ll not be affected by the CCT. Even if you have some poor years but on average you generate 6% you’ll be unaffected (during poor years, you receive a tax credit which you carry forward).
If, however, you own a business which rarely makes a taxable return of 6% (perhaps you’re waiting for capital gains or get some private benefits from the assets), the business will be taxed on the basis that it does. That means you’ll have to fund the new tax out of private income, realise some of the assets, or start running a profitable business. As well, you’ll no longer be able to carry any business losses across to unrelated income (like your wages) – they can only be carried forward.
The CCT is simple to work out, and uses existing accounting information.
Take a business with non-current assets of $100,000. The required minimum return is $6,000 and assume interest expenses are $2,000. The CCT is 30% of ($6,000 less $2,000) = $1,200. If actual EBIT was $8,000, then income tax (this is assessed on the $2,000 income over and above the $6,000 minimum required return) of $600 would be payable in addition to the $1,200 CCT.
This example highlights an important feature of the proposed tax regime. Capital that currently earns at least the required minimum return is unaffected by the CCT (under current rules, EBIT of $8,000 less interest of $2,000 would also generate $1,800 in total tax). Total tax paid is the same as it would be under today’s rules (assuming a tax rate of 30%).