Govt advisory group outlines tax options

Fairfax Media

OPTIONS: Top personal tax rates could fall but homeowners may pay higher taxes under the latest proposals by the Government's advisory group on changes to the taxation system.

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Top personal tax rates could fall but homeowners may pay higher taxes under the latest proposals by the Government's advisory group on changes to the taxation system.

In its final deliberations before reporting to the Government, the Tax Working Group says the tax system is "not sustainable" and there are "major growth, fairness, and integrity issues".

The group says it has considered a wide range of scenarios including a mix of tax cuts and "base broadening" options including new land taxes, changes to the taxation of investment property, and raising GST.

The working group will hold a public tax conference in Wellington on Monday, but said broadening the tax base was required.

Among the proposals is a cut in the top personal tax rate from 38c in the dollar to align it with the corporate rate of 30c, combined with changes to property taxes.

That option is supported in a paper by the Treasury, which says that distortions in the system by people trying to avoid paying the top tax rate could be ended by either cutting the rate, raising the income threshold, and legislating to close tax loopholes.

The IRD estimates the Government misses out on $300 million a year from wage earners who divert income into trust accounts to avoid paying the top tax rate, or use tax shelters such as shelf companies.

The Government this year lowered the top tax rate from 39c to 38c on income over $70,000, but has placed proposals to further lower taxes on hold because of the recession.

While Finance Minister Bill English and Prime Minister John Key have voiced doubts about imposing a capital gains tax on property or raising GST, both options remain in the working group's final report.

So does a proposal to "ring fence" losses on rental properties so taxpayers cannot offset them against wage or salary income.

A submission by the Reserve Bank to the group proposes a series of potentially controversial proposals including increasing rates to drive down house prices and lower the gains to be made from investing in property.

The bank says a capital gains tax is an obvious solution. However, if "administrative and other difficulties make this approach unattractive", options include cutting taxes on other investments such as shares or cash deposits to remove the property incentive, or factoring inflation into the tax on interest earnings.

The working group is also considering a proposal that would create KiwiSaver-style tax havens for investors, to help wean Kiwis off property.

Under the proposal, an employee would be able to put a portion of earnings into the schemes without paying tax on the income.

The drawback would be that any withdrawal from the schemes would be treated as taxable income.

TAX OPTIONS:

* Cut top personal tax rate in line with corporate and trust income tax rates.

* Cut taxes on capital income and remove ability to offset wage and salary income.

* Close tax shelter loopholes.

* Raise property taxes and/ or GST.

* Adjust tax rates on interest payments for inflation.

* Increase rates to push down property prices and ring-fence losses on rental properties.

* Allow income on capital investments to be tax-free until money withdrawn.

- © Fairfax NZ News