MinterEllisonRuddWatts Partner Rachel Devine and Senior Associate Simon Akozu discuss the new green taxes recommended by the Tax Working Group which, if implemented, will affect all businesses. Momentum is building for increased environmental tax measures, they write.
In its recent report, the Tax Working Group has indicated that environmental challenges call for profound changes to the structure of economic activity to create more sustainable patterns of economic activity. As a result, the Group has been looking at environmental taxes – economic instruments that can be revenue raising for central or local government and that can improve environmental and ecological outcomes.
The Group has recommended to the Government that its immediate priorities should include expanding the coverage and rate of the Waste Disposal Levy, strengthening the Emissions Trading Scheme (ETS) and advancing the use of congestion charging. Longer-term measures include water abstraction and water pollution tax, natural capital enhancement tax, changes to the existing concessions regime, and, high-level consideration of mechanisms to support Te Ao Māori.
These proposals, if implemented, will affect all businesses. In particular, we expect the short-term proposals will change the tax landscape for the following industries:
1. ETS: agriculture; forestry and pulp and paper; high energy demand industries, waste disposal, production of steel and other metals and extractive industries;
2. Waste disposal levy: waste businesses and landfill operators; construction companies; demolition contractors; scrap metal and recycling industries may benefit; and
3. Congestion charging: heavy transport industry, including freight forwarders; light transport industry, including couriers and operations such as Uber; flow-on effects to automotive industry and oil companies through reduced car usage.
Given the potential for significant change in these areas, these industries should keep a close eye on developments, including any indications from the Government that it will implement these recommendations. These mechanisms should be factored into short and long-term business planning.
Recommended short-term mechanisms
a. Increases to Waste Disposal Levies: Together with Minister Eugenie Sage’s focus on waste, the Ministry for the Environment is considering an increase in the scope, coverage and rate of the Waste Disposal Levy. It hopes that changes in this area would change behaviour (assuming that illegal dumping is managed). The Waste Disposal Levy is currently $10 per tonne and only applies to 11 per cent of landfills. These rates could increase to $140 per tonne, with a lower rate for inert waste. This would be consistent with approaches taken in England and Australia, for example.
b. Changes to the ETS: Although cross party negotiations are continuing, the Government has already begun drafting the Zero Carbon Bill, which aims to reduce New Zealand’s carbon emissions to net zero by 2050. Amongst other things, the Bill is expected to make changes both within the ETS and outside it to increase costs for emission intensive businesses and raise revenue as well. Interestingly, while the Tax Working Group supports reform to the ETS it prefers a tax-like system where all emissions face a price, including agriculture. In any event, they suggest greater guidance on price and auctioning emission units to raise revenue.
c. Congestion charges: The Tax Working Group supports the Government’s consideration of the future of the transport revenue system as part of its Urban Growth Agenda.
Possible measures in the mid- to long-term
In addition to the areas above, the Working Group is considering additional environmental tax measures that could be introduced in the mid-to long-term:
a. Water abstraction and water pollution tax: The Group recommends greater use of tax instruments to address water pollution and water abstraction challenges, if Māori rights and interests can be addressed. The Group suggest that a pollution tax might be done most easily by taxing fertilisers (an input-based tax). It is likely that regional councils will be attracted to both of these taxes, especially if the revenue is returned to them.
b. Natural Capital Enhancement Tax: The Group has considered the possibility of a natural capital enhancement tax, based on the environmental footprint of an activity. The rate of the tax would be set to reflect the ecological impact of activities. This tax would require a lot more work to implement than the water taxes contemplated.
The Tax Working Group also proposes changes to concessions (exemptions from taxes) – including both the removal of existing concessions that harm natural capital and the introduction of new concessions. The Group has recommended the Government consider:
i. Making the costs associated with the care of land subject to a QEII covenant (or Ngā Whenua Rāhui) tax-deductible;
ii. Allowing employers to subsidise public transport use by employees without incurring fringe benefit tax; and
iii. Reviewing various tax provisions specific to farming, forestry and petroleum mining with the view to removing concessions harmful to natural capital, while also considering new concessions that could enhance natural capital.
Te Ao Māori
The Te Ao Māori comments in the report are very high level. As discussed in the interim report, there is a desire to develop a framework that draws on principles from Te Ao Māori, the Living Standards Framework, and the principles of tax policy design to arrive at a more holistic view of wellbeing. The report notes that a discussion document will be released to keep the public informed on progress on this.
When will all this happen?
Changes to the ETS, the waste disposal levy and congestion charging are possible within this term of Government. The Government is well underway in developing the Zero Carbon Bill, which will set up the Climate Commission and tweak the ETS. The Bill is to be introduced to Parliament this year.
The timing of mid- to long-term changes is more speculative. The Government has already promised that there will not be resource rentals for water under its coalition agreement and so, at the earliest, water taxes could only be introduced in the next term of this Government
The Tax Working Group also commented that New Zealand has limited institutional capability to design and implement environmental taxes. The Group therefore recommended that the Government strengthen its environmental tax capacity, including resourcing the office of the Parliamentary Commissioner for the Environment to provide independent advice on environmental tax policy.
Please contact the authors if you have any queries about this article or topic. Further information is available in the Tax team’s summary of the report, available here.
Rachel Devine, Partner – Environment and Planning, provides advice on all aspects of environmental and resource management law for private and public sector clients – from design through to approval, implementation and operation. Rachel has advised extensively on requirements for resource consents, including major industrial and infrastructure projects, and implications of planning requirements. She has significant experience in obtaining complex environmental and project approvals for developers, and advises on other environmental issues including pollution licensing and contaminated land. Her commercial experience means Rachel can provide practical, down-to-earth solutions to environmental problems in any context – corporate transactions, planning projects or site management. In recognition of her environmental expertise, Rachel is President of the New Zealand Resource Management Law Association. Contact Rachel at firstname.lastname@example.org or connect via LinkedIn.
Simon Akozu is a tax specialist with more than 10 years’ experience delivering effective commercial solutions to a wide range of New Zealand and international clients. Simon has a particular focus on M&A, financing transactions, managed funds, inbound and outbound investments, and corporate insolvencies. Simon routinely advises clients on the tax aspects of: share sale and business asset sale transactions; property transactions and land development; financing arrangements, from facility agreements through to structured debt issuances and securitisations; collective investment vehicles, including limited partnerships and portfolio investment entities; and, inbound and outbound investment structures. Simon also regularly helps clients engage with Inland Revenue, from assisting with everyday inquiries and small adjustments, through to advising clients in significant multi-year tax disputes with the Commissioner of Inland Revenue. Contact Simon at email@example.com