The Government is facing a strong burden of expectation from business as it enters the second year of its first term. The Prime Minister sought to address this today by laying out his Government’s reform agenda in his Statement to Parliament.
This Brief Counsel provides a bullet point summary of the key policy announcements, hints and signals in the PM’s speech - including an analysis of the tax component by Tax Partner Casey Plunket who was a member of the Tax Working Group (TWG).
The Government is considering changes to the top personal tax rates, and to the personal tax structure across the board.
The Government will not proceed with a land tax, a comprehensive capital gains tax (CGT), or a risk free return method (RFRM) for taxing income from property.
Changes will be made to the way property is taxed.
The Government is considering an increase in GST, to no more than 15%.
Announcements will be made in the 20 May Budget.
The speech is cautious and conservative in its approach to taxation. In view of the general consensus that something has to be done, the changes foreshadowed are at the minimalist end of the scale. There is no significant change to the system of middle-class welfare institutionalised by the previous Government. Any property tax changes are (relatively speaking) at the margin, and the Government has not committed to the only change of any significance which it has not actually ruled out (i.e. the increase in GST).
Clearly this is a Government which does not want to introduce tax changes other than in response to a popular mandate.
The Government has taken on board the TWG’s view that the current tax system is unfair, bad for growth and needs to change. Particular flaws that the speech refers to are our over-reliance on income taxes, a rate structure which favours earning income in some ways rather than others, and under-taxation of property investment.
Budget 2010 will contain a reduction in the upper individual income tax rates, and quite possibly also some significant movements in the lower income tax rates and the tax brackets.
How significant remains to be seen. However, given that the Government has ruled out land tax and a comprehensive CGT, a more modest rate alignment (e.g. a 30% top marginal and trustee tax rate) seems likely, along with changes to the lower rates and tax brackets. An immediate corporate tax rate change seems less likely, though if Australia’s rate moves downwards, the pressure for ours to do the same will be irresistible.
Rate alignment at 30% has been estimated to cost $1.6 billion a year. Changes to the lower rates and brackets could cost that much again, or more. The total cost of the changes is accordingly likely to be in the region of $3 billion - $3.5 billion a year.
The issue then is how these income tax reductions will be funded. Reduction in the upper marginal and trustee tax rates could be funded solely out of changes to depreciation rules.
Denying depreciation on buildings altogether is estimated to raise up to $1.3 billion a year. This would reduce to between $700 million and $1 billion if losses on sale were deductible (though in that case there would also be a good argument for taxing gains on sale).
Taking the 20% loading of new plant and equipment would raise up to $300 million a year.
An interesting question with both of these possible changes is how they would be implemented. Based on previous depreciation changes, it seems unlikely that the proposals would apply to property already owned. There may also be pressure to exempt some classes of buildings from the changes, possibly on the basis that they do demonstrably depreciate over time.
Changes to the rest of the personal income tax rate structure (i.e. the lower rates and the brackets) as signalled in the PM’s speech will require increasing GST to 15%. This is estimated to raise $1.9 billion a year, after automatic indexation of benefits such as superannuation has been taken into account. The changes to the lower rates and brackets will increase incentives to work and to save generally, and also will reduce the very high effective marginal rates experienced by those receiving Working for Families benefits.
The Government will respond formally next week to the recommendations of the Capital Markets Development Taskforce and John Key is promising significant policy changes, including to the Securities Act.
The Prime Minister has also indicated an interest in whether there are opportunities to develop New Zealand as a hub for financial services in the Asia-Pacific region specialising in providing high-value middle and back office functions for the managed funds industry.
This seems to be an encouraging reference to the proposal (which Chapman Tripp has been involved in progressing) to reduce foreign investor PIR tax rates for unit trusts established in New Zealand to invest in foreign assets.
Science and innovation
Science and innovation is promised new funding in what will be a very tight budget. There will also be changes to the way the Government invests in Crown Research Institutes and “measures to get more research and knowledge out of CRIs and into firms”.
A discussion document will be released soon on potential changes to Schedule 4 of the Crown Minerals Act, including the removal of some areas within the Schedule and the addition of areas not currently in the Schedule. Any new mines on conservation land will have to meet “strict environmental tests”
Action this year to remove “particular regulatory roadblocks to water storage and irrigation in Canterbury” and to ensure that projects which meet environmental standards and are good economic propositions “can happen within a decent timeframe”
Legislation to change the regulations governing aquaculture.
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