Dramatic tax changes recommended
The Tax Working Group has recommended a range of comprehensive tax changes including a method of taxing capital gains on residential rental properties.
The government will take time to consider the report but no action is likely until Australia's Henry Review of its tax system (among other things) is made public. Ken Henry, the head of Australia's treasury, delivered his findings to the Australian Treasurer just before Christmas.
Options suggested in a report by the New Zealand group released today include a risk-free rate of return method for calculating capital gains on investment properties.
The report also has an option of a low-rate land tax.
The risk-free rate of return method works as follows: if someone owns a $300,000 property with a $200,000 mortgage and the annual risk-free return rate is set at 4 percent, taxable income is calculated at 4 percent of the $100,000 of equity in the property, giving a tax of $4000.
Someone on a personal income tax rate of 38 percent therefore ends up paying $1520 of tax.
"Put simply, the tax system is broken and needs to be fixed," group chairman Professor Bob Buckle said.
"We've suggested a number of ways this can be done."
There was a once in a generation chance for New Zealand to have a world class tax system, he said.
The report also recommends increasing GST to 15 percent, saying this would have merit on efficiency grounds, but any increase in GST would require compensation for those on low incomes.
The report also says that the company, top personal and trust tax rates should be aligned to improve the integrity of the tax system.
Government Reaction
Responding to the release, Finance Minister Bill English said the Government would carefully consider the options presented.
“The Government’s focus in 2010 is increasing New Zealand’s economic growth and productivity,” Mr English said. “There is no doubt that good tax policy can play a role in that.
“For ordinary New Zealanders, we’re particularly keen to ensure that our tax system rewards effort, encourages savings and helps families to get ahead.
“At a broader economic level, we also want a tax system that helps move us away from our recent preoccupation with borrowing and consumption – at the same time recognising that any changes must be broadly fiscally neutral given that we face several years of budget deficits.
“As we’ve said, any changes would have to meet tests of equity and fairness, alongside delivering benefits for households and the economy. And given that we face another six years of Budget deficits, they need to be broadly fiscally neutral.”
Revenue Minister Peter Dunne welcomed the Group’s call for tax policy changes to be made within a coherent long-term strategy and framework and for them to be sustainable politically.
“I note the Working Group’s concerns regarding the misalignment of tax rates which encourages the use of trusts and companies, with a tax rate of 33 per cent and 30 per cent respectively, to shelter income that would otherwise be taxed at the higher personal tax rate of 38 per cent,” Mr Dunne said.
“This is inherently unfair to the wage and salary earner who is then left to bear a disproportionate share of the personal tax burden.”
No to land tax - Business NZ
Business NZ chief executive Phil O’Reilly said many of the Group's recommendations would find support among the business sector, but noted caution on some - mainly the land tax suggestion.
“Business will be firmly supportive of the recommendation to get our company tax rate competitive with rates in other countries, an important factor for economic growth.
“There will also be support for alignment of company, top personal and trust tax rates and for lower personal rates.”
Mr O’Reilly said he shared the group’s concerns about the distortions that would arise from a capital gains tax and also agreed that work is required on the tax treatment of residential rental properties.
But he said there could be problems with the recommendation for a land tax as this would be an anticompetitive cost on New Zealand’s many land-based enterprises.
“Enterprises already face a fairly stiff land tax through local body rates and this recommendation if accepted would impose a second tier of land taxation.”
Mr O'Reilly said it would be important for the Government to give a clear direction on its thinking on tax reforms by the time of the Budget as the current system is a "drag on New Zealand’s capability and competitiveness".
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Comments and questions24
Would the risk-free rate of return really solve the problem with rentals? Would there not be an incentive to take out interest only loans to minimise the equity or to buy another property on a really long term loan to once again minimise equity and hence tax?
What about 20% GST to foods that send fatties to the hospital costing taxpayers a fortune?
Hmmm, I have made a few comments on property and tax matters and wonder where the Risk Free Rate of return would fall over.
The method appears to encourage leverage, not so good really
The method is not used in respect to other investments, for instance Foereign shares which use a Fair Dividend method. This is similar to the Risk Free Rate of return but does not deduct borrowings. Personally although I don't like the arbitrary nature of taxing overseas share on a different basis to Aus / NZ shares the FDR method is more desirable.
RFRR method does not deal with depreciation, and that is more significant in transferring tax burden from one sector to another.
Equalising top marginal rates for the many business/trust structures, excellent. We will all spend less on lawyers and accountants, and our tax returns will be a whole lot easier.
GST at 15%, I wonder about the black economy, but with new systems and more access to electronic data matching perhaps the fear of being caught and hung / drawn / quartered by the IRD will restrict that form of tax avoidance.
Risk Free rate of return?
Firstly too complicated(the IRD can't understand the RFRR method used for foreign investments), secondly a sledgehammer to crack a peanut.
Ony ones to get rich will be the accountants doing the tax returns(and I will admit I am one)
Ringfence the rental losses boys - so there is a limit of say $10000 per year of rental loss offset against other income with the balance to be carried forward to offset against future rental income.
One way of making sure people are in the rental game for legitimate reasons not for tax benefits
Keep it simple so we can all understand it
There was once a thing called a 'tax simplification committee' you know. Hard to believe but true
At least Phil O'Reilly uses his brain. TWG's assumption that property owners would welcome a double tax on their asset, gets a Z-.
O’Reilly has no idea about land economics.
Since unimproved land is not a produced asset, its supply is inelastic, which means that land value tax will not reduce the stock of land nor be passed on in rents.
Capital, labour and enterprise requires people to forego consumption, to work, and to take risks, and if these are taxed, people could reduce savings, employ them elsewhere, work less, work elsewhere, and take less business risks. In fact is is *these* taxes that makes NZ less competitive.
Does O’Reilly represent business (users of land, capital and labour, and vehicles for taking risks) or land owners? Although some businesses own land and would have to pay land tax, business is about a lot more than collecting or avoiding ground rent, and the opportunity cost of using land would not be affected by land tax.
Please explain the rationale for the 20% DPN removal.
Why do we not want businesses to invest in the latest and most efficient technology, to lift productivity and have some flow on to consumption. Removing this only incourage not removing marginal labour when a computer can do it, not getting the faster tractor which pollutes less.
Lots of car yards, farm equipment sellers and technology companies are going to fell this head on. But will slow the unemployment ratea and incourage more low cost low brain labour.
Removing the 20% is purely a removal of a minor deductable item.
Fully agree with removing DPN on buildings. An asset which typically appreciates.
Or, put another way, what is the social benefit of having high and volitile land prices?
Land value tax will not impact ground rents of land, it only impacts the ground rent income, after tax, of the land owner. The tax reduces land prices, and reduces land price to ground rent ratios, and makes them more stable.
So O’Reilly should really answer: what is the social value of high and volatile land prices? How does it help businesses? Households? He can't really provide an answer, because it doesn't serve any social purpose, and so the tax on unimproved land values actually reduces a social cost (the cost of carrying land price risk), as well as raising revenue that can enable taxes on businesses (and households and capital investments) to be reduced.
Total marxism. New Zealand Style
Cheers Comrade Key
Never mind more taxes - how about a closer look at what public tax monies are being spent on, and where our public monies are going?
There appears to have been no 'cost-benefit' analyses proving that the majority of tax-payers, citizens and ratepayers have benefitted from the contracting out (PRIVATISATION) of public services at both central and local government level.
How about CUTTING OUT THE CONTRACTORS?
Surely there are potentially billions $$$ to be saved by getting rid of all these 'piggies in the middle', and getting back to 'in-house' provision of public services?
The first step is for all Annual Reports, for local government and central government departments/SOES/CRIs/ etc to publish details of
'contracts issued' - ie: name of contractor (consultant)/term, value and scope of contract
so that they are available for public scrutiny.
'Open, transparent and democratically accountable' NZ - the 'least corrupt country in the world????
yeah right.
Penny Bright
waterpressure@gmail.com
As perhaps already commented a tax on property equity will not solve the problem. If you tax you need to take the property value as a whole. Taxing only equity will mean higher leveraged properties and therefore higher interest to deduct from other income. This does not encourage good investment and on the basis that 2/3rd mortgagee sales are investors do we really need more of the same. If property/deductions are really the issue, ring fence them so they can only be off-set against gains from the same asset.
EQUITY TAX:
thats a novel idea! tax "freehold",the banks have never had it so good -people should be eternally hocked in debt up to their gills
LAND TAX:
tax where there is NO INCOME GENERATED!!!...eg: vacant RATE levied sections,doubly taxed...just so that john keys banking buddies can enjoy a tax break
gee,how silly of me for thinking that a tax was supposed to be levied from actual REVENUE GENERATED!!!
classic!!!
KIWIS WAKE UP,since an average nzer mostly has property as their security nestegg,this is therefore a direct & scandellous attack on your security & future prosperity
dont let these sell-out politicans destroy your future security/nzs ecenomy
PROPOSED PROERTY TAXES:
is there a nz depression now looming?[USA vulture funds,get ready!]
"The TWG brought together expert tax practitioners, academics, businesspeople and offi cials" says the Professor who chaired this Group. Looking at the list of names, not a single hands-on business person amoungst them! Mark Weldon from NZX is as close as it gets. The rest are mainly Accountants and University types, with a feeding shoal of IRD and Treasury alongside.
We all know the maxim "let an accountant run the Company and it will die". Same applies to our country.
I agree, some excllent points made in the report. But where is there a single suggestion of any changes designed to lift productivity, grow exports on which we survive as a nation? At best it makes a slight attmept to try and align our total tax take with Australia.Almost totally ignores the biggest single reason people invest in residential real estate, the tax write offs gained.What is it, too easy for you guys to pick up on, or the accountants who make money from these deals don't want to lose a cash cow?
These look a pretty sensible and balanced set of recommendations. Most of the negative criticism seems to be from "interested" groups. My fear is that the politicians will be too gutless to risk upsetting anybody and the outcome will be largely the status quo.
LPL is totally correct. All that will happen is accountants will construct vehicles were the rental property borrows from a trust or other quasi-related party to leverage the equity away, and presto no tax charge.
The concept is very sound, force these inefficient poor-performing, tax refund generating assets to perform like other asset classes however it should be charged against the total asset.
The refunds claimed over the say 10 year period should be able to be deducted from any capital gain made on the sale of the rental property + a fair interest charge. That way a rental looks like any other investment.
The proposals of the TWG are fundamentally flawed. The main reason why the methodology employed is basically wrong is that the premise of economic efficiency presumes NZ has a perfectly competitive market. This is nonsense. As admirably shown by Dr Brash's 2025 Report NZ relies on foreign trade and imported capital - in other words the NZ market is far too small to have all the factors of production and consumers needed to achieve perfect competition. The only feasible way for NZ to achieve a perfect marjet is to join an economic market with Australia, the Pacific nations and possibly India. The TWG ignore (or miss) the Single Economic Market move with Australia and thus the basis for the tax reform is specious. Harmonisation with Australia in all aspects of the direct and indirect tax systems is the only way to achieve a Pareto efficient solution. More specifically if we look at elements of the report the suggestion that a capital gains tax is not feasible due to "administrative complexity" is total nonsense. Australia, Canada and the United Kingdom all have CGT. Moreover CGT would promote economic efficiency because it moves the tax base toward the Haig-Simons definition of income. Owner occupied housing is always exempt in a CGT.
Finally I totally agree with the post above about spending - take Vote Defence - we have wasted funds on 103 Lavs ($600m), 7 helicopters at $70m each ($500m), HMNZS Canterbury ($600m) and two OPV ($400m) - $2.1 billion on assets that are either unsuitable or not up to specification.
Answer to all of the above: Global Marxism 101. Or, from the same manual as global warming.
Wake up and smell the coffee people.
I agree with Tax Working Group chairman, Professor Bob Buckle, who wrote (in the Dominion Post, January 16) that raising the top tax rate in 2000 and the bringing in the Working for Families policy undermined the New Zealand tax system.
Raising the top tax rate and breaking the alignment between corporate, trust and the top personal tax rate in 2000 created incentives for people to divert income into lower taxed entities.
Any family receiving the Working for Families benefit earning more than $48,000 faces a tax rate of 53 percent or 58 percent on any extra dollar of taxable income. This creates an incentive for recipients to split or shelter income in trusts or other entities to qualify for that benefit.
If those two initiatives increased investment into residential property to minimize tax, then the logical starting point to fix the tax system would be at least to unwind those two policies.
But does the current government have the courage to touch Working for Families and the 39-cent top tax rate, or will it merely make a few further piecemeal changes regarding property investment?
The composition of the working group gave the impression of a bias against property investors. NZSX head Mark Weldon, who promotes investment in the stock exchange, and economist Gareth Morgan, who promotes investment into managed funds, sat among the 13 tax professionals, academics, representatives from the IRD, Treasury, and even from the Child Poverty Action Group. There was no one representing property investors.
It would be helpful if tax reform benefited everybody, even property investors. If piecemeal changes drastically shrink property investment returns, that, plus unbalanced tenancy law, patchy rent payers, misbehavior, and continual damage, will start an exodus of investors from the sector.
This poses a huge risk for the government. Since private landlords control 340,353 (75.3 percent) of the 451,965 rented dwellings in the nation, the government simply cannot afford to get it wrong.
Here we go again, I see it now, government tinkering with the fringes and not fully implementing the Tax working groups report.
In order to turn the economices around we need radicle changes, fair changes, tax alignment changes. There is percieved a will to do something now, strike while the irons hot and dont squander this golden opertunity to overhaul NZ tax system. Get stuck into the rentals, the trusts, CGT and make a difference and have some guts to get the changes through.
The sooner we do it the cheaper it will be in the long run.
And get rid of that rediculous ANTI NUCLEAR policy that has hamstrung this country for the last 25 years. That policy has financially gogged us for years.
reddeer - we ARE going nuclear.
have u not worked out what ETS is about?
Wouldn't Nick Smith make a great stand-in for Homer Simpson controlling(?) our first Nuclear Power Station!
Apu: you've got it.
the deal for Nuclear NZ has already been signed. aka: Copehagen
boy oh boy the greenies are going to get a real sense of 'warming' when this one blows up. they'll need 3 billion sun block
The excessive Taxes we are forced to pay is theft.
Cut back government spending and pay less tax
I agreed the tax system needs urgent reform. Most of the focus seems to be on those on lower incomes especially benficiaries, superannuitants and those sheltering income. The TWG recommends an increase in GST and the Govt. quickly indicates that Beneficiaries and those on super can expect an increase - fiscally neutral you know. What about the large number of middle class hard working and often underpaid families out here who don't have dependent children, we sit in the middle, our tax rate will not decline, we don't get benefits that will increase but we sure will pay the extra GST. No mention in the press about the IETC. If the Govt gets this wrong they will be a gonna.
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