Biggest tax package in a generation builds on lessons of global crisis

Thursday 20th May 2010

Substantial cuts to personal and company tax rates and a rise in GST to 15% represent a "once in a generation opportunity to change the direction of this economy," said Finance Minister Bill English, as he unveiled the biggest tax package since GST was introduced in 1985.

Worth $15 billion over four years, the tax package is a key part of the government's wider strategy to raise the rate and quality of economic growth by rewarding savings and discouraging consumption spending, consistent with widespread changes in personal behaviour caused by the global credit crunch.

The top personal tax rate will drop from 38% to 33% from October 1, the same date as the GST rate will rise to 15%, while English stole a march on Australia by announcing a cut in the company tax rate from 30% to 28% from April 1 next year, four years earlier than across the Tasman.

However, property investors have been hammered, losing the ability to claim depreciation costs against their rental income, and to use investment losses to exploit the Working for Families tax rebate system intended to assist low and middle income households. Fears proved unfounded that ring-fencing of property investment losses would be attempted, although the investment losses deduction rule was effectively "ring-fencing in drag", said KPMG tax partner Paul Dunne.

"It's bad for them, but not as bad as it could have been."

Foreign companies will also be paying around $200 million more a year through changes to "thin capitalisation" rules that will reduce the tax deductibility of interest payments from 75% to 60% of the value of local assets.

Other major announcements include changes to simplify the way taxpayers use loss-acquiring qualifying companies to assess their personal tax liability and new funding for the Inland Revenue Department to chase tax avoidance and evasion, to produce around $200 million additional revenue annually.

Much of that increase will come from targeting what Revenue Minister Peter Dunne called "property speculators" and the so-called "black" economy, where hidden activities are not taxed.

"This package is timely," said English. "It's pushing in the direction people are already going. That's why it's a once in a generation opportunity to change the direction of this economy."

As one of the few developed world economies where tax cuts are even possible, the Budget also allowed New Zealand to steal a march on the rest of the developed world.

"This shows to internal and external investment in that we are open for business and ready to go, and compared to everyone else, we're in great shape."

Key changes announced today are:

• Cuts to personal tax cuts at every threshold level, with the top personal tax rate falling from 38% to 33%; tax on income between $48,000 and $70,000 falling from 33% to 30%; a new 17.5% rate for income between $14,000 and $48,000, down from 21%; and 10.5% on income up to $14,000. Two-thirds of the tax returned by the package goes to income below $48,000, English says;
• A rise in the rate of GST from 12.5% to 15%, with a 2.002% compensating increase for beneficiaries, pensioners and recipients of Working for Families tax credits to offset the rise on October 1;
• An end to depreciation allowances on buildings deemed to have more than a 50 year life, to net around $1 billion a year in additional tax;
• Abolition from today of the 20% automatic depreciation loading available for newly purchased assets;
• A change to the tax treatment of loss attributing qualifying companies to become "flow through entities", similar to limited partnerships, expected to raise around $65 million a year;
• A cut in the rate for portfolio investment entities (PIEs) to 28%, to align with the new company tax rate, kicking in from October 1 for PIEs taxed at investors' marginal tax rates, and 2011/12 for other savings vehicles;
• Abolition of tax benefits relating to capital contributions for the purchase of capital ;assets;
• GST base-broadening to prevent so-called "phoenix" scheme frauds, where GST is reclaimed by an entity which liquidates before paying GST owed
• An end to the redundancy tax credit from October 1.

Further changes, covering areas such as distributions from trusts and income from cash PIEs will follow the Budget, for consultation and implementation by April 1.

The tax package gives away more than it brings in, collecting $1.09 billion less over the next four years than it gives away. However, the Treasury expects the package will add nearly half a percentage point to annual growth rates, so that it will be paying for itself by 2013/14, with $175 million more tax collected than given away by today's initiatives.

More Budget coverage:

Finely balanced tax package depends on growth dividend

Recovery gives NZ tailwind to rebalance economy, cut taxes

Property depreciation write-offs: here today, gone tomorrow

Government closes loophole and aligns tax rates for LAQCs

Government cuts tax on savings vehicles to 28%

Indexation loss tightens screws on Working for Families

Businesswire.co.nz

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