Property a likely tax target

Fairfax Media

UNDER PRESSURE: The pressure is on the Government to cut business taxes in next year's Budget, but property investors look set to be hit with new taxes as reform plans are finalised.

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The pressure is on the Government to cut business taxes in next year's Budget, but property investors look set to be hit with new taxes as reform plans are finalised.

NZX chief executive Mark Weldon warned yesterday that New Zealand must be ready to lower its corporate rate below 30 per cent, or risk a big flight of capital as Australia prepares to cut its business rate even lower.

Finance Minister Bill English said a move by Australia would be taken into account in the Government's tax package, due to be included in next year's Budget. That appeared to suggest business tax cuts could now be a higher priority than big personal tax cuts.

The Government was forced to drop plans for personal tax cuts this year, after the global crisis plunged its books into the red.

English said nothing had been ruled out except capital gains tax on the family house.

Speaking to the Government-sanctioned Tax Working Group seminar in Wellington, Weldon said Australia would probably drop its business rate to 25 per cent.

If that happened "we will clearly see flight of capital through the corporate sector", Weldon said.

Options could include dropping the rate to 25 per cent, setting differential rates for local and foreign companies, or leaving the rate at 30 per cent for smaller companies but setting a lower rate for bigger firms, which were more important for growth.

The Tax Working Group, chaired by Victoria University professor Bob Buckle, will next week finalise options to give to the Government before Christmas. The Government wants to lower the trust and top personal rates to 30 per cent - in line with the company rate - that would cost about $1.6 billion a year. It had pledged any changes would be fiscally neutral, so other revenue is needed to fill the gap.

But the group, which has been meeting for five months, said other base-broadening measures, such as property or land taxes, should be brought in anyway because the system was "broken".

The seminar heard a range of options, including a tax on land set at 0.5 per cent of value that would raise about $2b, an increase in the goods and services tax (GST) to 15 per cent, a capital gains tax and new taxes on investment property.

Weldon backed PricewaterhouseCoopers tax expert John Shewan's push for a tax on rental houses that would assume a return on the property of 6 per cent a year.

That would generate tax revenue of about $700 million a year, Shewan said, that could be used to cut taxes elsewhere.

Weldon said the tax system was skewed. Residential property investment overall made a loss and cost taxpayers up to $200m a year.

Corporate taxes were at the "pointy end" of competitiveness and cuts to them would offer "the biggest bang for your buck".

But property investors at the meeting took issue with the plan, saying negative investment returns in recent years were to be expected when interest rates were so high.

 The working group modelled nine possible scenarios including:

* Cutting the top rates to 30 per cent.

* Cutting the top rates to 27 per cent and lifting GST to 15 per cent.

* Cutting top personal and trust rate to 30 per cent, and company rate to 25.

* All are likely to need a mix of higher GST or property taxes to fund them.

- © Fairfax NZ News