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Dunne Reviews NZ's 'Realistic' Budget

Wednesday, June 16, 2010

During his post-budget address, Peter Dunne, New Zealand’s Revenue Minister, said the tax changes made in last month’s budget were aimed at boosting savings and investment, ensuring international competitiveness in tax rates, and keeping the tax system as simple as possible, by removing distortions within it.

One of New Zealand’s difficulties, he said, is that nearly one in five - just over 17% - of New Zealanders with skills both live and work overseas. Enticing those citizens to return and also retaining a skills base in the country are two of the government’s problems. The reduction in the top personal tax rate to 33% and in the company tax rate to 28%, are expected to help in that respect.

He also hoped that the fall in the top personal tax rate, to the same rate as the trust rate, should also mean that “there will be no longer any reason for the dramatic explosion in the number of trusts being set up by people to shelter income to minimise their tax liability.”

He confirmed that, when the goods and services tax (GST) rate rises to 15% in October, those on main benefits and fixed incomes, including pensioners, will be fully compensated immediately for that increase, with further cost of living adjustments due in April 2011.

He also recounted that there have been significant changes to the tax arrangements relating to investment property, most notably with respect to the removal of depreciation and the proposals to treat loss attributing qualifying companies on the same basis as limited partnerships.

“It is worth noting,” he said, “that the removal of the tax distortions affecting the investment property market, where an overall NZD200bn (USD139bn) investment shows annual losses of up to NZD500m costing about NZD150m a year, has been achieved without resorting to draconian measures like a land tax, a capital gains tax, or a risk free rate of return method.”

The government is, however, increasing the resources available to the Inland Revenue Department to carry out more tax audits - nearly NZD120m over the next four years. Peter Dunne is expecting the latest moves to boost revenue by nearly NZD750m over that period.

He said that the government is “cracking down on the great Kiwi pastime of finding loopholes in the system to exploit for tax and benefit purposes, most notably the 9,300 families identified by the Tax Working Group as using investment property losses to reduce their taxable income so they could qualify for Working for Families tax credits.”

He signalled more work is to be done in that area to close other loopholes.”For many New Zealanders,” he added, “such ‘gaming’ of the system simply offends their basic sense of fairness.”