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OCT 10

What will the tax changes deliver?

The Government originally touted the tax changes in the 2010 budget as the biggest for 25 years but now seem to be backing away from these comments with Finance Minister Bill English describing it as a “considered and consistent rate of change” on Q&A rather than “a massive restructuring”. Treasury has estimated the tax package will add 0.9 percent GDP growth to New Zealand’s economy over seven years which suggests that the tax package cannot be considered a step change.

The global economic crisis and New Zealand’s place in it suggest an abject policy failure. It seems a long time ago now but it is important to remember that New Zealand was in a recession by June 2008, well before the collapse of the finance giants in the United States. Our recession was made worse, but not caused, by the global problems.

An unbalanced tax system was one of the key drivers of the recession. The tax free status of capital gains on land and buildings encouraged excessive domestic debt and spending that created a huge debt mountain and stifled the tradeable sector. While a shift away from income and corporate taxes towards consumption tax is helpful, the changes are not nearly big enough to make a serious difference and the tax free asset gains haven has not been addressed.

The Tax Working Group identified these problems describing the tax system as “broken” and recommending a land or capital gains tax and the levelling of income, corporate and trust rate taxes to ensure fairness. The Government echoed this rhetoric in its Budget statement saying the tax changes are “based around a shift towards lower and more uniform rates of income tax, more indirect taxation and broadening of existing tax bases”. However, there is little in the actual package to do either of those things.

To make matters worse, the removal of the 20 percent depreciation loading has been removed taking away any incentive to invest in new and more productive equipment. The timing of the changes is also disappointing with the depreciation changes already in effect since the Budget announcement while the company tax cuts do not occur until 2011/2012.

Features of the Tax Package

Personal Tax The rates of personal income tax will reduce (effective from 1 October 2010) from 12.5% to 10.5% for income up to $14,000; from 21% to 17.5% for income between $14,001 and $48,000; from 33% to 30% for income between $48,001 and $70,000; and a reduction from 38% to 33% for income over $70,000.
GST The rate of GST will increase from 12.5% to 15% from 1 October 2010.
Company Tax The company tax rate will be reduced to 28% from the 2011/12 income year.
PIE The top Portfolio Investment Entity (PIE) tax rate and the tax rate for savings vehicles such as superannuation funds will be reduced to 28% from 1 October 2010 for PIEs that pay tax at investors' marginal tax rates and from the 2011/12 income year for other savings vehicles.
Depreciation   From the 2011/12 income year, tax depreciation will be set to 0% for all buildings with an estimated useful life of 50 years or more.
The 20% depreciation loading will be removed for assets purchased after 20 May 2010 (Budget day).

The actual changes amount to little more than tinkering rather than any serious attempt at reforming the tax system. Considering the anemic growth figures and Treasury’s debt projections more radical measures are clearly necessary. The return to a Balance of Payments deficit has signaled that some of the problems that caused our recession are starting to re-emerge; policy changes need to happen sooner rather than later.

tags: tax changes, tax working group, depreciation, r&d, capital gains tax, land tax
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