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Lower taxes possible - but property investors take the hit

Top personal, company and investment tax rates could be aligned at 27% - but property investors would take a hit.

That is one of the clearest outcomes of the Tax Working Group, which reported today.

Higher taxation on capital in some form or other will be needed if New Zealand is to lower personal and company tax rates, the group says.

The wide-ranging group canvassed a number of options – many  potentially and administratively difficult – and delivered its verdict that “the status quo is unsustainable.”

The unspoken rider to that is that you might not like the alternatives very much either.

The final report does take another look at a formal capital gains tax – something Prime Minister John Key and Finance Minister Bill English rule out about every full moon.

The government could, the report says, stick to its declared policy of aligning the company tax rate with the top personal and investment tax rates but New Zealand cannot afford to keep company tax at 30% much longer, particularly with Australia about to move to at least 27% or maybe even lower.

That would open up a tax hole of $3.1 billion, but a capital gains tax which excludes the family home would raise $3.9 billion at full strength – and that excludes taxing gains on owner occupied homes.

NZX chief executive Mark Weldon – who was a member of the working group – pointed out that company tax rates in the OECD’s smaller countries now average 26% - “and falling.”

However, an examination of the group’s other options shows a similar result could be achieved in a different way.

The government could achieve that 27:27:27 rate and up the GST rate to 15%, which would reap $1.9 billion a year.

Then other targeted options at property investors – a flat risk free rate of return rate (RFRM) on non-owner occupied residential property would bring in up to $700 million a year, plus another $150 million in losses now claimed by property investors which would be disallowed under a RFRM regime.

(An RFRM is set each year and is usually the government bond rate minus inflation.)

That gets the taxman $2.750 billion a year.

Remove the depreciation claimable on buildings now – on the grounds that they don’t actually depreciate in value at all – and the taxman nets a further $1.3 billion a year.

That adds up to just over $4 billion a year – which more than compensates for the $3.1 billion lost by flattening the tax scale to 27% top personal, investment, and company tax rate.

The group’s brief did not include the issue of whether spending could be cut – it had to assumed government spending would continue at current levels – but it does have strong words for the way changes to the welfare system, though Working for Families – has added to opportunities for people to “game” the tax system.

There was clearly a wide range of opinion among the working group – a majority is in favour of a land tax, but the report highlights the problems with that and there appears little appetite amongst the politically for such a tax, even with carve-outs for politically sensitive areas such as owner occupied homes.

But there appears a consensus that “at the very least” the top personal tax rate should be aligned with the top savings and investment vehicles.

More by Rob Hosking

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Comments and questions
6

John Key and his band of merry men are poised at the cusp of taking the medicine now for the good of the country and forgetting next elections etc and ensuring the prosperity and financial future health of NZ....deep down the New Zealand psyche understands that sometimes unpalatable things are needed for the greater good.

If JK and the team do the correct thing then they will be remembered for the outcomes , not the medicine, and ensure thir place in NZ political history!
If they pike on doing what is necessary for all of us then they'll be simply remembered as ..more politicians!!

What this country actually requires, is a 'complete review of the Welfare System'.
Weeding out the cheats, liars and lazy bludgers would save about 5 Billion.

yes slash govt spending,and say no to more taxes on ordinary kiwis

especially the land tax! we already pay absolutely outragous land taxes -called rates!

If we in New Zealand refrained from Polly Pandering ...we could save about six Billion Dollars a year ...,Give it some thought.

Imputed rental value of owner occupied housing (net of mortgage interest and some expenses) should be taxed as income. This was the case in the UK until the 1960's. It's explained on the internet - just Google it. No great mystery. The policymakers are undoubtedly quite aware of it but they choose to overlook it because it is politically very contentious. Clearly, failure to tax it amounts to a subsidy to owner occupiers effectively capitalised into higher house prices. Also it is inequitable that rent payers effectively do pay tax at income tax rates on the rental value of the property they occupy (they have to find a gross amount of income and pay tax on that before having a net amount of income with which to pay rent). Introduction, would broaden the tax base, remove a subsidy capitalised into higher house prices and remove a gross inequity.

Imputed rental value of owner occupied housing (net of mortgage interest and some expenses) should be taxed as income. This was the case in the UK until the 1960's. It's explained on the internet - just Google it. No great mystery. The policymakers are undoubtedly quite aware of it but they choose to overlook it because it is politically very contentious. Clearly, failure to tax it amounts to a subsidy to owner occupiers effectively capitalised into higher house prices. Also it is inequitable that rent payers effectively do pay tax at income tax rates on the rental value of the property they occupy (they have to find a gross amount of income and pay tax on that before having a net amount of income with which to pay rent). Introduction, would broaden the tax base, remove a subsidy capitalised into higher house prices and remove a gross inequity.