Tuesday, March 23, 2010
During a speech to the 33rd International Fiscal Association Conference in Christchurch, New Zealand’s Revenue Minister, Peter Dunne, said the government has accepted the need to address the issues the Tax Working Group (TWG) had highlighted, and the reform framework it set out, in its final report.
He confirmed that the TWG's recommendations are still being reviewed by the government in detail and final decisions on the overall shape of any tax reforms will be announced in the budget on May 20.
He said, however, that “it is pretty clear that there are certain areas of the tax system that should be addressed. Accordingly, we are likely to see changes to the tax treatment of property to make the rules fairer and more equitable for all taxpayers.”
“This is not an attack on landlords, as some have protested,” Dunne emphasized, “but a rebalancing act designed to address the concerns over the years about distortions favouring property investment over other forms of investment. In short, we want investment decisions to be driven by the quality of the particular investments, not just the tax advantages that may derive from them.”
He added: “There are also likely to be lower personal taxes across the board - not just for the top end of the income scale as some allege - to encourage productivity, investment and saving.”
Furthermore, while there has been much debate over the proposal to lift the goods and services tax (GST) rate to 15%, he stressed that “there will be no increase in the rate of GST unless there is appropriate compensation, and there certainly will be no exemptions of specific items introduced into the GST system.”
Finally, he disclosed that the government is still considering the company tax rate and its relationship to the top personal tax rate and that of trusts. He said that he had “long advocated a 30/30/30 alignment of tax rates as a simple solution to deal with problems that arise as a result of the differences in tax rates that allow companies and trusts to be used to shelter income.”
He concluded, however, that a problem would still remain - “in spite of the relatively recent reduction in the company tax rate from 33% to 30%, our rate remains higher than many Organisation for Economic Co-operation and Development countries.” This, he said, did not necessarily mean that New Zealand needs to drop the rate to match or outpace other countries, but it is an issue that the government is still weighing up.
While awaiting the government’s tax changes in the budget, the NZ Institute of Economic Research (NZIER) has calculated that the lower personal income taxes and higher GST rate are together likely to leave most households better off. NZIER’s preliminary estimates suggest the median household earning NZD65,000 (USD45,750) a year can be better off by around NZD12 a week.
NZIER has produced illustrative estimates, intended to allow households and businesses to assess and debate the proposed changes. They show, in fact, that high income earners will benefit the most from income tax cuts and the proposed GST increase, because high income earners pay more tax, both in absolute terms and as a percentage of their income (they earn more and spend more).
The estimates by broad income groups suggest the distribution of the tax burden (income tax and GST) will remain broadly unchanged. The top 20% income households will continue to pay around 46% of all income tax and GST; the top 50% income households will continue to pay around 80% of all income tax and GST; and the bottom 30% income households will continue to pay around 8% of all income tax and GST. Only if higher income earners spend some of their windfall gains on consumption, attracting GST, will they may pay more tax than now.
NZIER also stated that the other probable tax changes are more likely to impact on high income earners rather than low income earners, although they could not estimate their specific costs without further details.
However, investment properties are generally owned by higher income households, who may face a higher tax bill as a result of likely changes to the tax treatment of investment property. While, due to the changes to investment property tax treatment, landlords may seek to increase rents, which would impact more on lower income households, the NZIER’s opinion is that large rent increases are not likely.