TalkTax

One can imagine the Income Tax Act 2007 looking in the mirror on the morning of 1 January and saying to itself: “You need to loose some weight buddy”. Or the IR 3 trying to squeeze into its envelope and feeling as if it’s bursting at the seams. Alas, just like with everyone else, neither the Tax Act nor the IR 3 is likely to keep to their New Year’s Resolutions.

This year promises to be an interesting year in tax policy with many potential changes in the wings. The Tax Working Group Report released today may cast some light on the Government’s Tax New Year’s Resolutions, and this post discusses some of the measures proposed.

Capital Gains Tax, Risk Free Rate and/or Land Tax?

“The majority of the TWG support detailed consideration of taxing returns from capital invested in residential rental properties on the basis of a deemed notional return calculated using a risk free rate” see page 11 of their report.

There is a good chance that something will come out of the TWG work on this issue. Recent calls by prominent business commentators, however, indicate that this may become exactly the political hot potato that it has always been.

It looks like a general capital gains tax is off the cards, but RFRM is back on. The proposal is to investigate further the application of an RFRM applying to returns from residential rental properties. If this approach is taken it will be interesting to see how the impact flows through the system. Presumably the aim is to make it less profitable to invest in residential rental properties, so one would expect a reduction in the value of properties to take account of this reduction in profits. However, whether that will actually be the case remains to be seen. This policy change will have to be carefully considered because of the potential flow-on effects it could have.

In addition, the TWG also supports the introduction of a land tax. It is not clear whether that would be in addition to an RFRM, or instead. It is probable that both would apply because a land tax only would not solve the issues with residential rental properties being under taxed.

Tax Rate Alignment

New Zealand’s tax rates are significantly out of alignment, with different rates for companies, trusts, individuals and PIEs with no apparent economic rationale for this difference. The TWG proposes that the company, top personal, and trust rates are all aligned. In addition, they also recommend that the personal tax rates are lowered across the board.

Taxpayers should keep a close eye on this development, as with any rate changes there are always winners and losers. For example, taxpayers with losses to carry forward usually miss out when rates are lowered. This is so because the losses are now worth less. Before they could be used to offset a higher rate of tax, now, they can only be used against a lower rate of tax. Also, taxpayers with revenue assets in a realisable state may wish to defer selling these assets till when the rate has been lowered.

Increase GST to 15%

The TWG considers increasing GST to 15% would have merit because it would reduce the taxation bias against saving and investment. Increasing the rate of GST would require the least by way of legislative amendment, however it could have the greatest impact.  Because GST is generally regressive, increasing the rate brings with it further inequities, which would then also need to be corrected.

Again, there will be significant planning opportunities around the rate increase, if it does go ahead. For example, those ceasing their business after the rate increase will pay GST at 15% on the value of the assets. Those not covered by the increase will be taxed at the current rate of 12.5%.

Other base broadening ideas

The following may come through very quickly if the TWG has its way:

• Removal of the 20% depreciation loading on new plant and equipment;
• Removing tax depreciation on buildings (or certain categories of buildings) if empirical evidence shows that they do not depreciate in value;
• Changing the thin cap rules by lowering the safe harbour threshold to 60% or by reviewing the base for calculating this measure.

Conclusion

The year 2010 promises to be a year of big changes to the tax system. It is an important year for the Government to allow them to put their stake in the ground from a tax policy perspective. Any decisions are bound to be controversial; the TWG gives the Government a good point of reference from which to start considering the decisions.

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